Infrastructure provision and macroeconomic performance

This paper studies the differences between private and government provision of infrastructure. Capital utilization decisions and their differential role in determining market prices for capital goods under the two regimes of infrastructure provision serve as a critical transmission mechanism for fiscal policy. A subsidy to private providers of infrastructure is preferable to direct government provision irrespective of how the subsidy or expenditure is financed. The case for private provision is much stronger in economies characterized by high levels of congestion. The choice between private and government provision also has a crucial effect on the design of optimal fiscal policy.