OPTIMAL INFRASTRUCTURE AND ECONOMIC GROWTH

This paper develops an OLG model with endogenous fertility and education decisions to analyze the impact of transportation infrastructure on economic growth. This study argues that there is an optimal distribution of infrastructure in the region to boost the transition of an economy from economic stagnation towards the developing phase. The study assumes that the population induced productivity improvements and provision of optimal infrastruc-ture in the region will form the two necessary conditions for this transition. In line with what is actually seen during the process of development, if the transportation costs as a fraction of labor in-come are assumed to be decreasing, results obtained under section 2 imply a paradox. At a macro-economic level, the model proposes simpler micro-foundations of the geographical interpretations of economic growth in order to study the e¤ect of population density on growth. The higher population density enables the set-up costs of additional infrastructure in that region to be created, opening the possibility of enhanced welfare. But lagging behind on addi-tional investments in infrastructure could prolong the transition. Using time series data for years 1960-2010 on India, the study examines the role of transportation infrastructure on economic growth. Empirical evidences, with the help of OLS estimations, suggest that there is a negative impact of infrastructure costs on the fertility decisions of the parents and similarly, a positive im-pact of population density on economic growth. With the help of Granger causality test, study con\u85rms the unidirectional causality between population density and economic growth. The study also reects the governments emphasis on building new roads than building new railway tracks considering the costs involved. (JEL