Toward consumer city: Subway network expansion and consumption industry growth

Abstract

This paper examines the impact of changes in travel costs on the growth of consumption industries, using business registration data in China spanning 2012 to 2018. We leverage the expansion of the subway network in Xi'an, China to measure changes in travel costs across 1-km hexagonal grid units, quantified as the weighted sum of inverse optimal travel times to all potential destinations via road and subway networks. Employing the inconsequential units approach, our empirical analysis demonstrates that travel cost reductions significantly stimulate growth in the firm agglomeration, employment, and capital within consumption industries. This growth is driven by demand externalities and shifts in population composition. A decomposition analysis reveals that increased firm entry and lower road-based costs drive the growth of consumption industries, whereas reductions in subway-based costs lead to firm reallocation along the subway network. Additional evidence suggests that lower travel costs intensify market competition and foster product differentiation.