Foreign capital, public infrastructure, and wage inequality in developing countries

We establish four-sector general equilibrium models to investigate how an inflow of foreign capital influences the skilled-unskilled wage inequality in the presence of the endogenous public infrastructure provision. In the situation of the pure public infrastructure provision, the change of the skilled-unskilled wage inequality is determined by the comparison of the capital distributive shares in urban sectors. In the case of the semi-public infrastructure provision, the change of the skilled-unskilled wage gap is determined by the factor substitution elasticities in urban sectors. A potential extension is also given and it confirms the robustness of the obtained results. (C) 2013 Elsevier Inc. All rights reserved.