Trade and the Spatial Distribution of Transport Infrastructure∗

This paper constructs a theoretical model, in which transportation costs between two locations depend on cumulative infrastructure investment and governments allocate infrastructure spending over continuous space, thereby affecting the geographical pattern of transportation costs. Modelling international trade, we assume that governments set their infrastructure investment schedules in a non-cooperative fashion. We find that governments provide too little infrastructure investment because they ignore the benefits from reductions in domestic transportation costs that accrue to foreign consumers. Moreover, the distribution of infrastructure chosen by local governments is skewed towards central regions, which magnifies small discrete border frictions and creates ‘border regions’ within countries. French data on transportation costs are consistent with our theory. JEL Codes: F11, R42, R13