Competition and the Welfare Gains from Transportation Infrastructure: Evidence from the Golden Quadrilateral of India

What are the economic channels through which transportation infrastructure affect income? We study this question using a model of internal trade in which states trade with each other. In contrast to the previous literature, we do so in a framework that incorporates pro-competitive gains: changes in transportation costs affect the distribution of markups by affecting the level of competition that firms face. We apply this model to the case of the Golden Quadrilateral (GQ), a large road infrastructure project in India. We discipline the parameters of the model using micro level manufacturing and geospatial data. We find that: i) the project generates large aggregate gains, ii) both standard and pro-competitive gains are quantitatively relevant.