The IMF Working Papers series is designed to make IMF staff research available to a wide audience. With nearly 300 released each year, working papers cover a wide range of theoretical and analytical topics, including balance of payments, monetary and fiscal issues, global liquidity, and national and international economic developments.
This paper examines the impact of highway expansion on aggregate productivity growth and
sectoral reallocation between cities in China. To do so, I construct a unique dataset of
bilateral transportation costs between Chinese cities, digitized highway network maps, and
firm-level census. I first derive and estimate a market access measure that summarizes all
direct and indirect impact of trade costs on city productivity. I then construct an instrumental
variable to examine the causal impact of highways on economic outcomes and the underlying
channels. The results suggest that highways promoted aggregate productivity growth by
facilitating firm entry, exit and reallocation. I also find evidence that the national highway
system led to a sectoral reallocation between cities in China.