Firm inventory behavior and the returns from highway infrastructure investments

Abstract The debate in public and macro economics over the returns from infrastructure spending has largely ignored transportation economics, which has documented substantial inefficiencies created by highway policy and motivated researchers to explain how infrastructure spending produces economic benefits. This paper develops a theoretical argument that highway infrastructure investments generate benefits by lowering firms' inventories and provides empirical estimates of returns based on this mechanism. We find that annual returns from highway investments have fallen to less than 5 percent during the 1980s and 1990s and suggest that a partial explanation may be the rising cost of inefficient transportation infrastructure policy.