Highway Networks and Allocative Efficiency: Firm-level Evidence from China

This paper investigates the impacts of the highway network expansion on how efficiently resources are allocated across firms in China. We develop an accounting framework with heterogeneous markups and factor wedges across firms to measure allocative efficiency. Empirically, we find that the highway network expansion improves allocative efficiency, mainly by facilitating more efficient factor allocations across firms. We establish causal effects of the highway network expansion on allocative efficiency by using Faber (2014)'s least cost path spanning tree networks to construct our instrumental variable.