Transport Capacity, Price Gaps, and the Economic Return: A Unique Natural Experiment in China

The goal of this study is to improve upon the existing literature in quantifying the economic return of transportation infrastructure. Specifically, I propose incorporating the changes of between-city price gaps to approximate economic benefits that have been omitted by the current literature. Identifying the causal impact of new infrastructure on price gaps is complicated. To circumvent this problem, I propose to employ empirical settings in which natural experiments can be constructed to eliminate the effects of confounding factors. In particular, I consider two cities in northwestern China; they are connected by a railroad, the capacity of which was doubled in my sample period (1993-1996). I find strong evidences suggesting that increasing the railroad capacity significantly decreased price gaps. The change in price gaps implies a real economic return of between 12% and 24% per year. ∗I thank Roger Gordon for invaluable guidance. The draft is preliminary and all errors are mine. Contact: Department of Economics 0508,University of California, San Diego, 9500 Gilman Drive,La Jolla, CA 920930508,U.S.A., [email protected].