A structural estimation of the return to infrastructure investment in China

• Main Authors: Wu, Laura Guiying, Feng, Qu, Wang, Zhifeng
• Other Authors: School of Social Sciences
• Format: Article
• Language: English
• Published: 2022
• Subjects: Social sciences::Economic development; Infrastructure Investment; Productivity Effect
• Online Access: https://hdl.handle.net/10356/157001
• Institution: Nanyang Technological University

The productivity effect of infrastructure investment is controversial in the traditional literature using aggregate production function estimation due to reverse causality. This paper develops a new approach, using a structural model of firm-level production function, and matching Chinese firm-level production data with province-level infrastructure data. The estimated rates of return are about 6 percent averaged from 1999 to 2007. The returns triple if national-level spillover effects are taken into account. Controlling for the demand effect of public expenditure leads to smaller but still positive returns. The effect of infrastructure investment on firm-level productivity is heterogenous. With an increase in infrastructure investment, lower productivity firms are more likely to exit and higher productivity firms gain more market share.