The Cursed Virtue: Government Infrastructural Investment and Household

Abstract: Using Chinese provincial panel data for the period 1978-2006, this paper studies the relationship between government infrastructural investment and household consumption. In our baseline reduced-form regression, we find that a one percentage point increase of infrastructural investment in the government budget leads to a 0.31 percentage point reduction of the share of household consumption in GDP. This result holds qualitatively in a variety of specifications and under different estimation methods. In contrast, private investment is not found to have any significant impact on the share of household consumption. Our structural estimations establish two channels for government investment’s negative effects, one by encouraging the development of the secondary sector that is more capital intensive than agriculture and services, and the other by increasing profits in the industrial sector.