Openness, Lobbying, and Provision of Infrastructure

Abstract

Casual empirical evidence suggests that infrastructure provision is higher in economies that are open to world trade. We develop a model of imperfect competition to show that open economies are likely to provide more infrastructure than closed economies. If infrastructure is financed by taxing a producer lobby, the open economy will overprovide while the closed economy will underinvest; an open economy approaches optimal provision when this lobby group is small in size. If financing of infrastructure is done by taxing the whole population, the closed‐economy outcome may be preferred relative to that of the open economy.

The Role of Economic Infrastructure and Trade Openness in Attracting Foreign Direct Investment in Developing Countries

“…Establishment of good economic infrastructure increases productivity of the local firms supporting them to lower production costs, become competitive, and even steal market share from multinationals in both domestic and export markets. According to Chakravorty et al (2008), this market-stealing effect motivates developing economies to invest more in economic infrastructure. Therefore, trade openness and infrastructure development interact insofar as the attraction of FDI is concerned (Donnenfeld & Weber, 2000;Greenaway & Kneller, 2007;Ng'ang'a, 2022).…”