Public infrastructure and trade in a dynamic two‐country model

We develop a two‐country dynamic trade model with public infrastructure having an “unpaid‐factor”‐type positive externality on private sectors’ productivity. With welfare‐maximizing national governments making infrastructure investment, we show that a country with a smaller labor endowment, a lower depreciation rate of infrastructure, and/or a lower time preference rate will become an exporter of a good that is more dependent on infrastructure and will gain from trade, whereas its trading partner may lose from trade. We consider both the nonstrategic governments case and the case of strategic governments that recognize the effect on the terms of trade.