Infrastructure Development Versus Direct Cash Transfer: A General Equilibrium Comparison

Abstract

This paper attempts to provide an explanation to the debate whether infrastructure development is more effective than direct cash transfer to reduce wage disparity between skilled and unskilled workers. We use a simple general equilibrium structure to argue that in presence of symmetric productivity effects direct cash transfer meets the target when such transfer is financed by tax revenue collected from skilled wage bill. Nevertheless, in case of asymmetric productivity effects the arguments boil down to how different sectors absorb infrastructural facility to improve their productivity.