The Economic Impact of Public Capital: Evidence from Chinese Prefectures and Firms

Abstract

This study estimates the economic impact of public capital by constructing the public capital stock of 214 prefectures in China from 1999 to 2006 and combining the data of both prefectural economies and manufacturing firms. Using an instrumental variable estimation strategy, the empirical results show that public capital increases aggregate output in the economy, specifically in the secondary and tertiary sectors. Such growth mainly comes from the increased labor supply and reduced labor costs and, hence, more firms emerge.