push infrastructure investments affect welfare through an exogenous positive TFP shock in Ethiopia in a spatial general equilibrium model. Vanden Eynde and Wren-Lewis (2021) and Abbasi et al. (2022) use a reduced-form econometric approach and find evidence of strong economic complementarities for roads and electricity in the context of rural India and the SubSaharan Africa region, respectively. None of these papers study the optimality of government infrastructure investment policies and their implications.

Another strand of related literature endogenizes infrastructure investment in quantitative spatial economic models. Fajgelbaum and Schaal (2020) study transport networks to assess optimal investments and inefficiencies in the road networks of European countries. Santamaria (2020) assesses how governments can adjust transportation infrastructure to unexpected economic changes. Both studies, however, exclusively focus on the transportation infrastructure.<sup>3</sup> Arkolakis and Walsh (2023) provide a spatial theory in which a planner affects the production and demand of electricity by choosing the electricity price at each node, and apply it to assess the global impact of the rise of renewable energy. Their framework likewise does not account for investments in other infrastructure types.

The remainder of the paper is organized as follows. Section 2 describes the expansion of the roads and electricity networks in Brazil and the relationship between infrastructure quality and structural change. Section 3 develops the model. Section 4 discusses its calibration. Section 5 shows the quantitative results and main counterfactuals. Section 6 investigates the relationship between optimal infrastructure and political preferences. Section 7 concludes.

# **2 Background and Data**

This section quantitatively describes the road and electricity network expansion in Brazil and the spatial structural transformation process that accompanied the increased infrastructure availability. Our data comes from several sources. The sectoral employment shares and electricity access come from the Integrated Public Use Microdata Series (IPUMS-I, 2019), comprising four waves of individual and household survey data from 1980-2010. We complement these data with the information from Brazil’s national electricity regulatory authority, ANEEL ( _Agência Nacional de Energia Elétrica_ ), and from the Ministry of Infrastructure and Transport of Brazil, DNIT ( _Departamento Nacional de Infraestrutura de Transportes_ ).

> 3There is a growing literature on the economic impact of road quality improvements. Gallen and Winston (2021) have a dynamic general equilibrium model where transportation is treated as capital funded by taxpayers. Morten and Oliveira (2023) use a general equilibrium trade model and rich spatial data to study how road infrastructure facilitates the movement of traded goods. Trew (2020) and Allen and Arkolakis (2022) study how transportation improvements arise in decentralized settings. Balboni (2019) develops a dynamic spatial model to analyze whether transportation improvements should concentrate in coastal areas under the risk of rising sea levels. Alder (2023) builds a spatial model to analyze whether connecting large economic centers or mediumsized cities is more optimal. Reduced-form studies include Gertler et al. (2022), Asher and Novosad (2020), Bird and Straub (2020), and Jedwab and Storeygard (2021).

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