“Measuring the Social Return to InfrastructureInvestments: a Natural Experiment in China” by Zhigang LI
University of California, San Diego
The objective of this study is to measure the economic benefits of infrastructure investments. Specifically, I consider a large investment in 1994 that doubled the capacity of a one-thousand-mile-long railroad in China. This capacity expansion, intuitively, may gain welfare by increasing interregional trade and decreasing prices of traded goods. Formally, I derive a measure of the welfare gain, which requires interregional price gaps and the impact on them of the capacity expansion. To quantify these parameters, I introduce a structural model of the price gaps. My key identification strategy is a natural experiment in which the capacity expansion affects only the goods traded in one direction but not in the other. I find that the capacity expansion decreased relevant price gaps by thirty percent, corresponding to an internal rate of return of between fifteen and sixty-one percent. This return was obviously greater than the capital cost during the sample period (1992-1998), suggesting that the infrastructure investment can be beneficial in an economic sense.