Productivity Effects and Determinants of Public Infrastructure Investment

This paper discusses competition between high-quality private service providers that maximize their own profits and a low-quality public service provider that maximizes social surplus.There are two heterogeneous consumer groups: those who demand only high-quality services and those who care little whether services are highor low-quality.The setting reflects the fact that some consumers feel dissatisfaction with public service providers.We show that, under certain conditions, social welfare is smaller when there is a public service provider than when there is not.The result holds even though the efficiency of the public service is equal to that of the private services.