Public infrastructure and foreign investment in the presence of monopolistic competition

Abstract

In the context of a small open economy where producer services sector operates under conditions of monopolistic competition and the level of foreign investment is endogenously determined. this paper examines the impact of changes in the supply of public infrastructure on various economic variables. The public infrastructure, which also enters consumer utility function in the form of a pure public good, reduces the fixed cost associated with the production of the services sector. It is shown that an increase in the supply of public infrastructure increases wage-rental ratio, decreases foreign investment and decreases the degree of monopoly power in the services sector.