Physical vs. Institutional Public Goods Provision : Evidence from China

This paper argues that political and market concentration level explains why non-democracies often under-invest in institutional infrastructure and legal capacity. Economic growth challenges this equilibrium and incentivizes rulers to invest in institutional infrastructure complementary to physical infrastructure. Rulers make joint investments to expand market entry and size if they can secure greater rents and preserve institutions favoring concentration. Instrumenting market concentration level with the share of the coal mining industry in local industrial output, the difference-in-differences analysis of Chinese data from 1997 to 2006 shows that the fiscal expenditure ratio of physical to institutional infrastructure rose 42% faster in provinces with market concentration indexes in the top quartile in 2000 (the year before China acceded to the World Trade Organization). The paper also presents a theoretical model proposing that investment in physical infrastructure rises faster than institutional infrastructure when the market concentration level increases