Connectivity and economic growth

Abstract

We present a simple theoretical model that illustrates the benefits of regional connectivity and specialization for growth. Starting with one community, we show how welfare measured by utility per head increases as the number of connected communities increases. We assume a common connectivity infrastructure through which a central planner is able to add new communities to the pool of already connected communities, a costly but rewarding activity that is funded by levying a tax on those already connected. We find that increasing production costs lead to faster transitions toward the steady state, whereas increasing transportation and communication costs tend to lengthen the transition. The results point to reductions in transportation and communication costs, in particular, as a suitable vehicle for speeding up growth and underline the existence of a positive scale effect that induces integration and reinforces both transitional and steady state growth.