Large-scale transport infrastructure investments connect both large metropolitan centres of production as well as small peripheral regions. Are the resulting trade cost reductions a force for the diffusion of industrial and total economic activity to peripheral regions, or do they reinforce the concentration of production in space? This article exploits China's National Trunk Highway System as a large-scale natural experiment to contribute to our understanding of this question. The network was designed to connect provincial capitals and cities with an urban population above 500, 000. As a side effect, a large number of small peripheral counties were connected to large metropolitan agglomerations. To address non-random route placements on the way between targeted city nodes, I propose an instrumental variable strategy based on the construction of least cost path spanning tree networks. The estimation results suggest that network connections have led to a reduction in GDP growth among non-targeted peripheral counties. This effect appears to be driven by a significant reduction in industrial output growth. Additional results present evidence in support of a trade-based channel in the light of falling trade costs between peripheral and metropolitan regions.

A growing literature has documented the role of firm heterogeneity within sectors for nominal income inequality. This article explores the implications for household price indices across the income distribution. Using detailed matched U.S. home and store scanner microdata, we present evidence that rich and poor households source their consumption differently across the firm size distribution within disaggregated product groups. We use the data to examine alternative explanations, propose a tractable quantitative model with two-sided heterogeneity that rationalizes the observed moments, and calibrate it to explore general equilibrium counterfactuals. We find that larger, more productive firms sort into catering to the taste of richer households, and that this gives rise to asymmetric effects on household price indices. We quantify these effects in the context of policy counterfactuals that affect the distribution of disposable incomes on the demand side or profits across firms on the supply side.

Tourism is a fast-growing services sector in developing countries. This paper combines a rich collection of Mexican microdata with a quantitative spatial equilibrium model and a new empirical strategy to study the long-term economic consequences of tourism both locally and in the aggregate. We find that tourism causes large and significant local economic gains relative to less touristic regions that are in part driven by significant positive spillovers on manufacturing. In the aggregate, however, these local spillovers are largely offset by reductions in agglomeration economies among less touristic regions, so that the national gains from trade in tourism are mainly driven by a classical market integration effect. (JEL L60, L83, O14, O18, R11, Z31, Z32)

We propose and implement a new approach that allows us to estimate income-specific changes in household welfare in contexts where well-measured prices are not available for important subsets of consumption. Using rich but widely available expenditure survey microdata, we show that we can recover income-specific equivalent and compensating variations from horizontal shifts in what we call “relative Engel curves”—as long as preferences fall within the broad quasi-separable class (Gorman 1970, 1976). Our approach is flexible enough to allow for nonparametric estimation at each point of the income distribution. We apply the methodology to estimate inflation and welfare changes in rural India between 1987 and 2000. Our estimates reveal that lower rates of inflation for the rich erased the real income convergence found in the existing literature that uses the subset of consumption with well-measured prices to calculate inflation.

The arrival of global retail chains in developing countries is causing a radical transformation in the way that households source their consumption. This paper draws on a new collection of Mexican microdata to estimate the effect of foreign supermarket entry on household welfare. The richness of the microdata allows us to estimate a general expression for the gains from retail FDI, and to decompose these gains into several distinct channels. We find that foreign retail entry causes large and significant welfare gains for the average household that are mainly driven by a reduction in the cost of living. About one quarter of this price index effect is due to pro-competitive effects on the prices charged by domestic stores, with the remaining three quarters due to the direct consumer gains from shopping at the new foreign stores. In contrast, we find little evidence of significant changes in average municipality-level incomes or employment. We do, however, find evidence of store exit, adverse effects on domestic store profits and reductions in the incomes of traditional retail sector workers. We also show that the gains from retail FDI are on average positive for all income groups but regressive, and quantify the opposing forces that underlie this finding. Finally, we find that the estimated gains are specific to foreign entry, rather than being driven by the entry of modern store formats more generally.