How transportation costs affect China’s spatial misallocation of factors

The “inability of factors to flow freely” is the fundamental cause of spatial misallocation. Many literature has discussed how various artificial distortion restrict factor mobility and cause resource misallocation, while neglecting geographic barriers. Over the past two decades, China’s substantial investment in the transportation sector has significantly reduced transportation costs and weakened the barrier effect of geography, creating an opportunity to examine how changes in transportation costs affect the spatial misallocation. This study finds that transportation costs are significantly positively correlated with the spatial misallocation, and the impact of road is greater than that of railway. The reduction in transportation costs has a more significant impact on factor misallocation in eastern and central cities that have larger market scales and are embedded in urban agglomeration networks. Mechanism analysis shows that lower transportation costs alleviate the spatial misallocation by promoting inter-city trade, personnel exchange, and information exchange. This paper proposes a new method to estimate the spatial misallocation, compares the heterogeneous impacts of different transportation modes, and provides a new perspective for the formation of factor misallocation.