Roads to Prosperity or Bridges to Nowhere? Theory and Evidence on the Impact of Public Infrastructure Investment

Abstract

Households use their disposable income to consume, invest in domestic capital, and buy state-contingent assets Bt+1(s), which pays one unit of Home consumption goods if a particular state of nature s occurs in period t + 1, at price pbt,t+1. We assume that, as with aggregate consumption, aggregate private investment is a CES composite of Home and Foreign tradable goods with identical weight and elasticity. Private capital accumulates according to the following law of motion

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