the Efficiency-Electricity scenarios. This occurs because, when we do not allow for shared budgets, the government can get less advantage of the infrastructure complementarities, and then the weight of the exogenous productivities in its decision becomes larger.

The correlations between the log of sectoral productivities and the log of road-quality investment are given by the bottom panel of Table 6. Except for agriculture, the sign and relative magnitude of the correlations are similar to the ones in the top panel but smaller in absolute value. This occurs because any improvement in the quality of roads that directly affects two locations can potentially change the least-cost path of other locations, which makes the correlation with its own productivity less meaningful. In the case of agriculture, the modelsolution correlations are smaller than in the data, signaling that other fundamentals, such as geographical barriers and the degree of infrastructure complementarities, can be playing against isolated locations in rural areas.

Taken together, Table 6 says that, in most cases, the quality of infrastructure moves more closely with the exogenous productivities in the model solutions than in the data. Hence, a source of the misallocation is the lack of a correct internalization of the productivity effects.

# **5.2.2 Infrastructure Investment Complementarities**

Next, we turn to another important aspect behind the public capital misallocation: the complementarity of investments. We first ask the question: if the government optimally allocates one type of investment, keeping the other type of infrastructure as observed in the data, what would be the relative gains? The last two columns in Table 7 show the results of this counterfactual experiment. If the government can only reallocate electricity or road investments, the welfare gains are large, 7.52% and 10.97% relative to the benchmark (given by the observed infrastructure data), respectively. We can see also that the average income increases by 3.4% and 10.7%, while for median income, the gains are slightly smaller, 2.85% and 10.25%.

When the government can decide on both types of investments, the gains are substantially larger. This is shown in the first two columns of Table 7. When budgets are kept separated, the Efficiency + Coordination allocation generates median income, average income, and welfare gains of 14.88, 15.85, and 19.75 percent, respectively. If we also allow for a joint budget, the gains are even larger. The Fully Optimal solution produces welfare gains of around 22%, comparable in magnitude to the gains in average and median income. In the Fully Optimal counterfactual, it is important to note that, besides reassigning investments to different road segments, the government also increases the share of total expenditure on roads.

Table 7 provides clear evidence that the government benefits from the complementarities of investments in both electricity and road infrastructures. When comparing the Efficiency + Coordination scenario to the Efficiency-Roads and Efficiency-Electricity cases, we see an increase of 1.26 percentage points in the welfare gains due to a larger degree of efficiency in the allocation within each infrastructure budget. Moreover, comparing the Fully Optimal and 29