Reshaping Infrastructure: Evidence from the division of Germany
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Marta Santamaria: University of Warwick
The Warwick Economics Research Paper Series (TWERPS) from University of Warwick, Department of Economics
This paper quantiﬁes the gains from infrastructure investments and shows that reshaping the highway network after a large economic shock, the division of Germany, had positive welfare and income eﬀects. To address the endogeneity between infrastructure and economic outcomes, I develop a multi-region quantitative trade model where infrastructure is chosen by the government to maximise welfare. I calibrate the model to the prewar German economy and estimate the key structural parameter of the model using the prewar Highway Plan. I exploit the divisionofGermany,alarge-scaleexogenousshocktoeconomicfundamentals,toshowthatthe model can predict changes in highway construction after the division. Using newly collected data, I document that half of the new highway investments deviated from the prewar Highway Plan. I ﬁnd that the reallocation of these investments (one-third of the network) increased real income by 0.69% to 2% each year, compared to the construction of the original prewar Plan. Finally, I ﬁnd a large cost of path-dependence: the ability to reshape the full network in anticipation of the division could have increased real income by an additional 1.85%.
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Persistent link: https://EconPapers.repec.org/RePEc:wrk:warwec:1244
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