Infrastructure, growth and the two dimensions of industrial policy.

Justman, Moshe

When sustained growth depends on establishing an indivisible infrastructure for directly productive activities (DPAs) both discrete and marginal departures from optimal growth can undermine the dynamic efficiency of the market Producers' anticipations of paying monopoly fees for infrastructure services dampen their incentive to invest in DPAs and may prevent the economy from reaching a minimal level of activity that would justify investment in a large indivisible infrastructure; and potential investors in infrastructure may be intimidated by the prospect of expropriatory regulation Thus a credible prior commitment to effective but fair regulation is necessary for achieving optimal growth. But it may not be sufficient. Low-level expectations before the infrastructure is established can be self-fulfilling, indicating a role for coordinative industrial policy. Investment subsidies, even in conjunction with regulation, cannot induce an efficient equilibrium.

INFRASTRUCTURE (Economics); MATHEMATICAL models of economic development; ECONOMIC development; INDUSTRIALIZATION; ECONOMETRIC models; INDUSTRIAL policy; ECONOMIC policy; INVESTMENTS; INVESTORS

Review of Economic Studies, 1995, Vol 62, Issue 1, p131

0034-6527

Academic Journal

10.2307/2297845