An Analysis of the Optimal Provision of Public Infrastructure : A Computational Model Using Mexican Data

We construct a intertemporal general equilibrium model and use it to examine infrastructure effects on Mexican national income. We consider three types of infrastructure, electricity, transportation, and communications. We then estimate production functions for the 16 major sectors of the economy in which sectoral output depends upon inputs of capital and labor, as well as the stocks of the three types of nfrastructure. We then use these estimates to analyze the optimal level of government spending on the different types of infrastructure. Despite the fact that the estimated output elasticities with respect to public infrastructure are relatively high, increased expenditure on infrastructure has rapidly decreasing benefits. Some benefits could be achieved by modest increases in capital expenditures, although at the cost of significantly higher inflation and real interest rates. Indeed, the increase in real interest rates causes the benefits of enhance infrastructure to be greatly reduced