Infrastructure Quality and the Subsidy Trap

Shaun McRae

American Economic Review, 2015, vol. 105, issue 1, 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)

JEL-codes: H23 H54 L94 L98 O12 O13 (search for similar items in EconPapers)
Date: 2015
Note: DOI: 10.1257/aer.20110572
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Citations: View citations in EconPapers (59)

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Working Paper: Infrastructure Quality and the Subsidy Trap (2009)
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