JMP, Building up local productivity: Infrastructure and firm dynamics in Mexico

What determines the aggregate and distributional effects of new transport infrastructure?

One key overlooked channel is that infrastructure policy may change the incentives of firms to enter, exit, and grow, leading to endogenous changes in local productivity. In this paper, we quantify the importance of this channel using detailed Mexican microdata and a spatial general equilibrium model that incorporates firm dynamics.

Leveraging random delays in the construction of highways, we empirically show that productivity increases in places with better transport infrastructure. Firms play a critical role in driving this result: highways increase firms’ survival and entry rates, and their total factor productivity and size.

Calibrating our model on census data between 1998 and 2018, we find small welfare and aggregate income gains but substantial spatial reallocation of workers and production. Nearly half of these effects are explained by changes in local labor productivity, which in turn, are driven by better firm selection.