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Abstract
The goal of this study is to improve upon the existing literature in quantifying the
economic return of transportation infrastructure. Speci¯cally, I propose incorporating
the changes of between-city price gaps to approximate economic bene¯ts that have been
omitted by the current literature. Identifying the causal impact of new infrastructure on
price gaps is complicated. To circumvent this problem, I propose to employ empirical
settings in which natural experiments can be constructed to eliminate the e®ects of
confounding factors. In particular, I consider two cities in northwestern China; they
are connected by a railroad, the capacity of which was doubled in my sample period
(1993-1996). I ¯nd strong evidences suggesting that increasing the railroad capacity
signi¯cantly decreased price gaps. The change in price gaps implies a real economic
return of between 12% and 24% per year.