Infrastructure Provision, Capital Utilization, and Macroeconomic Performance

Santanu Chatterjee
University of Georgia

AKM Mahbub Morshed
Southern Illinois University

January 2008

ABSTRACT

This paper studies the differences between economies where infrastructure is privately provided and those in which the government is the sole provider. Endogenous capital utilization decisions and their role in determining market prices for private capital and infrastructure provide a critical channel through which fiscal policy affects macroeconomic performance. The mode of infrastructure provision affects the degree to which capital utilization decisions can be internalized by the private sector, thereby impacting on an economy's response to fiscal shocks. A targeted subsidy to private providers of infrastructure is unambiguously preferable to direct government provision (in terms of welfare), irrespective of how the subsidy or expenditure is financed or externalities such as congestion. In fact, the case for private provision is much stronger in economies characterized by high levels of congestion in infrastructure services. An income tax is more distortionary when both private capital and infrastructure are privately provided, than in the case where the government assumes responsibility for infrastructure provision. The choice between private and government provision also has a crucial effect on the design of optimal fiscal policy.

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