Road expansion, allocative efficiency, and pro-competitive effect of transport infrastructure: Evidence from China

This paper exploits the rapid expansion of China’s road infrastructure in the 2000s to empirically investigate the pro-competitive effect of transport infrastructure via the allocative efficiency channel. Dispersion of firm markups is used to gauge allocative efficiency of resources. We address the endogenous provincial road length by instrumenting road using a least-cost path route, and deal with the endogenous timing of road construction by using a network theory algorithm to predict road construction time. Our results show the mass construction of new road infrastructure, by lowering domestic trade costs, can significantly reduce markup dispersion of industries with high reliance on transportation. The baseline estimation indicates that the road expansion in China during 1998–2007 has induced at least 28.8% reduction in markup dispersion. Further analysis by disentangling price and marginal cost indicates that the reduced markup dispersion is primarily caused by the price drop of high-markup firms in the product market instead of cost reduction in the input market. This finding validates the presence of pro-competitive effect of road infrastructure. The heterogeneous analyses show several scenarios in which market competition is strengthened and the pro-competitive effect is more clearly manifested.