Filling potholes: macroeconomic effects of maintenance versus new investments in public infrastructure

The maintenance of existing public infrastructure has often been neglected in favor of building new infrastructure in developing countries. This paper develops a dynamic general equilibrium model that analyzes the reasons and effects of such neglect. First, the optimal level of maintenance is shown to depend on the size of new investments as a share of existing public infrastructure and on the productivity of infrastructure. Second, the model is parameterized and solved numerically for a sample of Latin American countries. Quantitative results show that reallocating funds from new infrastructure to maintenance can have positive effects on these countries’ GDP.