Differences in productivity explain much of the gap in incomes between rich and poor countries. A growing strand of research suggests that these differences in productivity are driven by capital misallocation: more productive firms in low income countries cannot obtain capital to expand their operations. If this is the case, policies that promote better capital allocation will increase productivity, raising incomes and helping to alleviate poverty.
Even if the banking sectors in low income countries like India are inefficient due to rigid regulations, why don’t lenders from wealthier countries profitably lend to productive firms? One possibility is that foreign lenders lack the information to identify productive firms and the tools to monitor them.
If this is the case, infrastructure that decreases the cost of identifying and monitoring firms in the developing world may reduce capital misallocation. This project hypothesises that the expansion of airports reduces the costs of foreign lenders gaining information about and monitoring firms. Therefore, researchers expect the expansion of airports to reduce capital misallocation in low income countries.
More broadly, the expansion of airports may increase economic growth through a variety of other mechanisms. Airports may make it easier to transfer technological know-how and reduce the costs of importing inputs and exporting products.
To do this, researchers combine three rich data sources: the CapEx database, which contains data on the location, timing, and size of all infrastructure investments in India from 1995 to the present, the States of India database, which includes district-level data on growth and sectoral composition, and the Prowess database, which consists of a panel of rich firm-level data, including financial data and information on foreign borrowing.
- Researchers will first investigate the role that airport expansions play in stimulating district-level and firm-level growth.
- They will then estimate firms’ production functions, allowing them to test if airport expansion decreases capital misallocation and/or increases average productivity.
- Finally, the researchers will test whether increased foreign borrowing explains any reduction in capital misallocation.