How Productive is Public Investment? Evidence from Formal and Informal Production In India

71 Pages Posted: 25 Jun 2016 Last revised: 27 Jul 2020

See all articles by Santanu Chatterjee

Santanu Chatterjee

University of Georgia - C. Herman and Mary Virginia Terry College of Business - Department of Economics

Thomas Lebesmuehlbacher

Xavier University

Abhinav Narayanan

Government of India - Reserve Bank of India

Date Written: July 27, 2020

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 the output elasticity of public capital, 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.

Keywords: Informal sector, formal sector, public investment, output elasticity, quantile regression, Golden Quadrilateral, Infrastructure, Manufacturing, India.

JEL Classification: E2, H4, H5

Suggested Citation

Chatterjee, Santanu and Lebesmuehlbacher, Thomas and Narayanan, Abhinav, How Productive is Public Investment? Evidence from Formal and Informal Production In India (July 27, 2020). Available at SSRN: https://ssrn.com/abstract=2800275 or http://dx.doi.org/10.2139/ssrn.2800275

Santanu Chatterjee (Contact Author)

University of Georgia - C. Herman and Mary Virginia Terry College of Business - Department of Economics ( email )

Department of Economics
University of Georgia
Athens, GA 30602
United States
706-542-1709 (Phone)

HOME PAGE: http://https://sites.google.com/view/schatterjee/home

Thomas Lebesmuehlbacher

Xavier University ( email )

3800 Victory Parkway
Cincinnati, OH 45207
United States

Abhinav Narayanan

Government of India - Reserve Bank of India ( email )

Bakery Junction Service Road
Vazhuthacaud
Thiruvananthapuram, Kerala 695033
India

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