Infrastructure Quality and the Subsidy Trap
- (pp. 35-66)
Abstract
Electricity and water are often subsidized in developing countries to increase their affordability for low-income households. Ideally, such subsidies would create sufficient demand in poor neighborhoods to encourage private investment in their infrastructure. Instead, many regions receiving large subsidies have precarious distribution networks supplying users who never pay. Using a structural model of household electricity demand in Colombia, I predict the change in consumption and profits from upgrading low-quality electricity connections. I show that the existing subsidies, which provide greater transfers to areas with unreliable supply, deter investment to modernize infrastructure. Finally, I analyze alternative programs with stronger investment incentives. (JEL H23, H54, L94, L98, O12, O13)Citation
McRae, Shaun. 2015. "Infrastructure Quality and the Subsidy Trap." American Economic Review, 105 (1): 35-66. DOI: 10.1257/aer.20110572Additional Materials
JEL Classification
- H23 Taxation and Subsidies: Externalities; Redistributive Effects; Environmental Taxes and Subsidies
- H54 National Government Expenditures and Related Policies: Infrastructures; Other Public Investment and Capital Stock
- L94 Electric Utilities
- L98 Industry Studies: Utilities and Transportation: Government Policy
- O12 Microeconomic Analyses of Economic Development
- O13 Economic Development: Agriculture; Natural Resources; Energy; Environment; Other Primary Products