LAUSR

This paper examines how government investments in infrastructure affect new firms’ creation and location. We analyze two scenarios. With an optimizing government, optimal location is a function of government expenditures in infrastructure. With a passive government, optimal location is independent of government expenditures in infrastructure. Productivity effects in the formal sector, as contrasted with informal sector, yield a greater impact on the formation of capital stock, and shadow price of location. The impact of fees on informal firms and taxes of formal firms affect output and welfare. With an optimizing government, entrepreneurs in the formal sector will have higher output and welfare; with a passive government, it is likely that the welfare of informal entrepreneurs is smaller than the one of formal entrepreneurs.