Project Research Theme 1: Firms, Frictions and Spillovers, and Industrial Policy, Research Theme 4: Trade and Spatial Frictions

Heterogeneous Impacts of Market Integration: Evidence from Pakistan’s Motorways

This project has been retired

Years active

  • to

Funding category

  • Small Research Grants

Across the world cranes and excavators are abuzz building out and upgrading transportation infrastructure. The mammoth’s share of this construction over the next three decades will take place in lower-income countries. These improvements are seen as core ingredients for achieving structural transformation and economic growth. As markets within and across countries become more integrated, the ability for firms to trade flourishes. Such integration, however, creates winners and losers, with some firms reaping the rewards while others perish. If this means the exit of unproductive firms, aggregate productivity may rise. Yet in the presence of other constraints, even productive firms may be slow to take advantage of infrastructure as it is built, muting its potentially transformative effects. This project studies the heterogeneous impacts of expanding transportation infrastructure and how these effects translate to changes in the spatial distribution of economic activity.

Drawing on a vast administrative dataset of all formal firms in Pakistan, the project examines the rollout of several large-scale motorways that were designed to connect the north and south of the country. This data, based on income and sales tax filings, provides information on firm performance, including quantities, prices, trade, and buyer-supplier networks. The researchers use a difference-in-differences estimation strategy based on quasi-exogenous variation in motorway access to examine firm-level responses to the arrival of motorways (such as how networks, products offered, and prices shift). They then apply the results in a spatial trade model to understand the aggregate consequences and look deeper into the heterogeneous impacts by firm.

The expansion of transportation infrastructure is seen as a critical channel for spurring industrialisation. The dearth of high-quality infrastructure in many low-income countries and sub-Saharan Africa in particular makes this an important topic of study as it can shape where such investments should be made and whether other accompanying policies need to be drafted alongside them. Despite the magnitude of the investments required in sub-Saharan Africa’s infrastructure, understanding how these investments change firm behaviour and the composition of local economies is still not well understood. This project, though set in Pakistan, can reveal valuable insights at both the micro and macro level on how large-scale transportation investments translate to changes in trade flows, structural transformation, and firm productivity.

Small Research Grants

Closed • Deadline • Small Research Grants

Research Team

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