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Reshaping Infrastructure: Evidence from the division of Germany

Marta Santamaria
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Marta Santamaria: University of Warwick

The Warwick Economics Research Paper Series (TWERPS) from University of Warwick, Department of Economics

Abstract: 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%.

Date: 2020
New Economics Papers: this item is included in nep-tre and nep-ure
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