Measuring the Social Return to Infrastructure Investments Using Interregional Price Gaps : A Natural Experiment

The objective of this study is to provide microeconometric evidence on the welfare gain of transport infrastructure investments. Specifically, I consider an investment in China that doubles the tracks of a one-thousand-mile-long railroad in 1994. This provides a quasi-experimental setting: the expansion in rail capacity only affects the trade of goods in one direction. I first estimate the impact of this investment on interregional price differences, finding that they are reduced by about thirty percent following the investment. I then derive a (partial equilibrium) measure transforming the estimated shrinkage of price gaps into welfare estimates. I find that the internal rate of (social) return of the investment may significantly exceed the costs of capital in China