Crowding-in or Crowding-out: How Infrastructure Investment Affects Household Consumption

This paper constructs a dynamic model of household consumption decisions and accordingly designs empirical analyses to identify how infrastructure investment affects private consumption. The estimation results of provincial panel data reveal that infrastructure investment can not only indirectly promote household consumption through the income channel but also directly promote household consumption expansion through the expectations channel, with a significant “crowding-in” effect. However, the effect is significantly weaker in provinces with a lower housing supply elasticity, showing the “crowding-out” pattern through the wealth channel. Household survey data provide an explanation for individual heterogeneity. Infrastructure investment has a greater pushing effect on house prices in provinces with a lower housing supply elasticity. Rapid house price growth has significant “crowding-out” effects on the consumption of wealthy households. This not only significantly weakens the driving effect of infrastructure investment on aggregate household consumption, but also increases wealth inequality in the long term. This paper explains how infrastructure investment affects household consumption and the corresponding role played by house prices, providing empirical evidences for theoretical studies related to macro-regulatory policies in China.