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How productive is public investment? Evidence from formal and informal production in India

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  • Chatterjee, Santanu
  • Lebesmuehlbacher, Thomas
  • Narayanan, Abhinav

Abstract

We use firm-level data on formal and informal production in India to examine the sectoral consequences of government investment in public infrastructure. Our results indicate that proximity to highway infrastructure, time since project completion, and firm size are important determinants of the sectoral effects of infrastructure on firm productivity. First, we show that while public capital is associated with a positive and significant output elasticity for formal sector firms, it has no systematic effect on informal firms. Next, using a major highway construction project in India, we show that proximity to a newly completed highway and the time since project completion are productivity-enhancing for formal firms, with these benefits distributed evenly across firm size in that sector. By contrast, similar benefits do not accrue to informal firms. Specifically, the presence of large firms in areas close to a newly completed highway crowds out the output of small informal firms, thereby mitigating the overall benefits of public investment for the informal sector.

Suggested Citation

  • Chatterjee, Santanu & Lebesmuehlbacher, Thomas & Narayanan, Abhinav, 2021. "How productive is public investment? Evidence from formal and informal production in India," Journal of Development Economics, Elsevier, vol. 151(C).
    • Handle: RePEc:eee:deveco:v:151:y:2021:i:c:s030438782100002x
    DOI: 10.1016/j.jdeveco.2021.102625
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    5. Verma, Priyam, 2024. "Optimal Infrastructure after Trade Reform in India," Journal of Development Economics, Elsevier, vol. 166(C).
    6. Elena Perra, & Sanfilippo, Marco & Sundaram, Asha, 2022. "Roads, Competition, and the Informal Sector," Department of Economics and Statistics Cognetti de Martiis. Working Papers 202221, University of Turin.
    7. Priyam Verma, 2024. "Optimal Infrastructure after Trade Reform in India," Post-Print hal-04676412, HAL.
    8. Santanu Chatterjee & Stephen J. Turnovsky, 2023. "Government expenditure and informality in an emerging economy: the recent experience of India," Indian Economic Review, Springer, vol. 58(2), pages 293-318, September.
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    More about this item

    Keywords

    Informal sector; Formal sector; Public investment; Output elasticity; Quantile regression; Golden quadrilateral; Infrastructure; Manufacturing; India;
    All these keywords.

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • H4 - Public Economics - - Publicly Provided Goods
    • H5 - Public Economics - - National Government Expenditures and Related Policies

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