We investigate the role of transportation infrastructure in explaining resource misallocation and income in India. We extend the endogenous variable markups model by Atkeson and Burstein (2008) into a multi-region setting in which asymmetric states trade 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, we find preliminary evidence that is consistent with our theory. Using the construction of the Golden Quadrilateral as a natural experiment, we find that prices declined by 20% in districts crossed by this road. We calibrate the model and simulate an improvement in Indian road quality. We find the aggregate gains for improved road quality. We also decompose these gains into Ricardian and pro-competitive components.
Asturias, J.; García-Santana, M.; Ramos, R. Misallocation, Internal Trade, and the Role of Transportation Infrastructure. (2014) 35 pp.