Capitalization effects of digital infrastructure in Chinese cities: agglomeration, accumulation and technovation

Abstract The construction of digital infrastructure requires substantial capital investment from both the government and private sector. A key question arises: to what extent do these investments contribute to economic growth and welfare? This paper investigates this issue through the lens of the capitalization effect. Specifically, we leverage China’s “Broadband China Pilot Policy” as a quasi-natural experiment in digital infrastructure development and employ panel data from 298 cities between 2010 and 2021. Using a staggered difference-in-differences (DID) approach with two-way fixed effects (TWFE), we empirically establish the presence of a significant capitalization effect. Furthermore, we examine several potential mechanisms associated with the capitalization effect, focusing on population agglomeration, capital accumulation, and technological innovation. The results provide suggestive evidence that these factors are potential channels through which digital infrastructure may affect urban housing markets. To quantify welfare implications, we construct a partial equilibrium framework and integrate an LSTM-based deep learning model for predictive analysis. Furthermore, our partial-equilibrium analysis provides a model-implied monetary assessment of the potential welfare implications of digital infrastructure investment, while acknowledging the limitations of interpreting housing-price capitalization as direct welfare gains. This study provides valuable insights for digital infrastructure investment decisions in developing countries.