Annual Conference

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Economic Transformation of Asia

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May 2017

A Structural Estimation on the Return to Public Infrastructure Investment in China

This paper develops a model of endogenous productivity to examine the impact of public infrastructure investment on output. It matches Örm-level production data with province-level infrastructure data to address a set of wellknown identiÖcation issues in the literature, and employs a structural estimation to distinguish the long-run productivity e§ect from the short-run Keynesian demand e§ect of public infrastructure investment. The estimated rates of return of infrastructure are 9.2% and 2.5%, respectively, for revenue-based and quantitybased total factor productivity. The returns almost triple once maximal spillover e§ects are taken into account. Firm-level evidences are consistent with a mechanism in which public infrastructure investment functions as a catalyst in facilitating resource reallocation from less productive Örms to more productive Örms.
Keywords: Public Infrastructure Investment, productivity, Rate of Return, Resource Reallocation
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