INVESTING IN PUBLIC INFRASTRUCTURE: ROADS OR SCHOOLS?

Manoj Atolia, Bin Grace Li, Ricardo Marto and Giovanni Melina

Macroeconomic Dynamics, 2021, vol. 25, issue 7, 1892-1921

Abstract: Why do governments in developing economies favor roads rather than schools in public investment scale-ups? We study this question using a dynamic general equilibrium model and argue that the different pace at which roads and schools contribute to economic growth, public debt intolerance, and political myopia are central to this decision. In a thought experiment with a large return differential in favor of schools, a benevolent government would intuitively devote the majority of an investment scale-up to them. However, the fraction of schools chosen by the government falls with increasing levels of debt intolerance and political myopia. In particular, political myopia is a meaningful explanation for the observed result to the extent that an extremely myopic government would not invest in schools at all.

Date: 2021
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Working Paper: Investing in Public Infrastructure: Roads or Schools? (2017)
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