Misallocation, Internal Trade, and the Role of Transportation Infrastructure

Wednesday, 20 August, 2014
Asturias, Garcia-Santana, and Ramos (2014) investigate the role of transportation infrastructure in explaining resource misallocation and income in India. They extend the endogenous variable markups by Atkeson and Burstein (2008) into a multi-region setting in which asymmetric states t rade with each other. High transportation costs that result from poor infrastructure quality generate misallocation of resources by increasing dispersion in market power across firms. Using a rich micro-level dataset constructed from manufacturing and geospatial data, the authors find preliminary evidence that is consistent with their theory. Using the construction of the Golden Quadrilateral as a natural experiment, they find that prices declined by 20% in districts crossed by this road. They calibrate the model and simulate an improvement in Indian road quality. They find the aggregate gains for improved road quality and decompose these gains into Ricardian and pro-competitive components.