A structural estimation of the return to infrastructure investment in China

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.