Estimating Productivity of Public Infrastructure Investment

The productivity e¤ect of public infrastructure investment is controversial in the traditional literature using aggregate production function estimation, mainly due to reverse causality. This paper develops a new approach, using a model of endogenous productivity in a …rm-level production function, and matching Chinese …rm-level production data with province-level infrastructure data. The estimated rates of return are about 6% averaged from 1999 to 2007. The returns triple if national-level spillover e¤ects are taken into account. Controlling the demand e¤ect of public expenditure leads to lower but still positive returns. Firmlevel evidences are consistent with a mechanism in which public infrastructure investment facilitates resource reallocation from less to more productive …rms. JEL Classi…cation: C23, D24, E22, H54, O40