Title: Measuring the Economic Return to an Infrastructure Investment Using Interregional Price Gaps: a Natural Experiment
Reference Number: 1144
Publication Date: September 2005
JEL Classifcation: H54, O18, R41

Zhigang Li
The University of Hong Kong

The objective of this study is to measure the economic benefits of infrastructure investments. Specifically, I consider an investment in China that doubled the tracks of a one-thousand-mile-long railroad in 1994. This capacity expansion, intuitively, may gain welfare by increasing interregional trade and decreasing prices of traded goods. I first estimate the impact of this investment on price differences across regions. The identification relies on a key feature of my setting that the expansion in rail capacity only affects the trade of goods in one direction. I find that the investment significantly reduces interregional price gaps, and this effect is robust to both reduced-form and structural estimation techniques. In the second stage of analysis, using a partial equilibrium framework, I derive a welfare measure that transforms the estimated price-gap effect into welfare estimates. I find that the internal rate of return of the investment may significantly exceed the costs of capital in China.

Key words: Infrastructure Investment, Interregional Trade, Chinese Economy

Last modified: 04/24/2006