Infrastructure, transport costs and trade

This paper examines the role of infrastructure in a bilateral trade model w ith transport costs. Transport costs are assumed to depend inversely on the level of infrastructure. The accumulation of infrastructure, however, is s ubject to a resource cost technology which includes both fixed and variable components. It is shown that, depending on geography and endowments, equil ibria with or without infrastructure can be obtained. For pairs of countrie s for which investment in infrastructure is optimal, the model predicts a p ositive relationship between the level of infrastructure and the volume of trade. The paper offers empirical evidence, utilising an augmented gravity model acid data from European countries, which strongly supports this predi ction of the theory. (C) 1999 Elsevier Science B.V. Ail rights reserved.