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A structural estimation of the return to infrastructure investment in China

Guiying Wu (), Qu Feng () and Zhifeng Wang

Journal of Development Economics, 2021, vol. 152, issue C

Abstract: 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.

Keywords: Infrastructure investment; Productivity effect; Demand effect; Resource reallocation (search for similar items in EconPapers)
JEL-codes: D24 E22 H54 O18 R53 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1016/j.jdeveco.2021.102672

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