Firms' Investment under Financial and Infrastructure Constraints: Evidence from In-House Generation in Sub-Saharan Africa

Abstract

Abstract While it is well known that financing and infrastructure constraints negatively affect economic development, the correlations between these constraints have been underexplored in the economics literature. This paper focuses on the implications of financing and infrastructure constraints by studying firms’ investments in electric generators as a response to public power interruptions. A theoretical model demonstrates that financial constraints lower economic returns on owning electric generators, making firms less likely to install private generators if the public power supply becomes unreliable. The empirical results show that, controlling for other factors, firms with a lower cost of external financing are more likely to own private generators in areas where the public power supply is less reliable. Observed correlations among reliability of power supply, financial constraints, and investment in electric generators thus appear consistent with the hypothesis that underdeveloped financial markets and inadequate infrastructure can be a greater barrier for economic development than either of these constraints separately.