Financing Infrastructure in Developing Countries: Lessons from the Railway Age.

This paper considers the role of infrastructure investment in the economic development of the regions of overseas European settlement in the 19th century. Its premise is that the pattern of investment in general, and the roles of public intervention and external finance in particular, were consequences of the structure of financial markets in countries in the early stages of economic development. Government intervention, external finance and debt-servicing difficulties were correlates of the financial-market imperfections that gave rise to informational asymmetries, moral hazard and adverse selection, while government policies to overcome asymmetric information encouraged management to engage in bankruptcy for profit. The tradeoff between credit rationing and bankruptcy for profit is at the heart of the paper.