Economics of Infrastructure

A conference on "Economics of Infrastructure" took place in Cambridge on March 2. Research Associates James M. Poterba of MIT and Edward L. Glaeser of Harvard University organized the meeting supported by the Smith Richardson Foundation. These researchers' papers were presented and discussed:

Treb Allen, Dartmouth College and NBER, and Costas Arkolakis, Yale University and NBER

The Welfare Effects of Transportation Infrastructure Improvements

In this paper, Allen and Arkolakis develop a framework to characterize the impact of infrastructure investment on welfare. They suppose infrastructure investment affects the cost of shipping goods between directly connected locations and the total bilateral cost between any two locations is determined by traders optimally traveling across the complete transportation network. The researchers approach comprises two distinct but complementary characterizations: First, they characterize how infrastructure investment between any two connected locations decreases the total trade costs between all pairs of locations. Second, they characterize how the cost reduction between any two locations changes affects welfare. The researchers apply these results to shipment level data between U.S. cities to calculate the welfare effects of improving each portion of the U.S. Interstate Highway System (IHS). They find very heterogeneous welfare effects of improvements to different sections of the IHS - reducing the travel time by 30 minutes on I-95 South from New York to Philadelphia would increase aggregate U.S. welfare by 0.02%, whereas reducing the travel time by 30 minutes from Seattle to Salt Lake City along I-84 East would only increase aggregate U.S. welfare by one-hundredth of that.

Marquise McGraw, Consumer Financial Protection Bureau

Airline Hub Airports and Local Economic Outcomes

McGraw considers the effects of airline hub airports on a city's economy over the 19782012 period. Using a panel dataset of yearly outcomes for cities with airports, combined with data for when an airport was labeled by an air carrier as a hub, McGraw considers the effects of hub openings and hub closings. To accomplish this in the presence of possible endogeneity, he turns to a synthetic control event study design which allows for the estimation of causal outcomes. He finds that hub airports increase per-worker wages by 1.1 to 1.8 percent, and economic output measures such as personal income and total payroll by 1.7 to 4.3 percent. These findings mostly arise from a hub's opening, rather than its closing. These findings support the hypothesis of airline hubs functioning as a productive amenity, providing high-quality infrastructure that supports business activity.

Stephan Heblich, University of Bristol; Stephen J. Redding, Princeton University and NBER; and Daniel Sturm, London School of Economics

The Making of the Modern Metropolis: Evidence from London

Modern metropolitan areas involve large concentrations of economic activity and the transport of millions of people each day between their residence and workplace. However, relatively little is known about the role of these commuting flows in promoting agglomeration forces. Heblich, Redding, and Sturm use the revolution in transport technology from the invention of steam railways, newly-constructed spatially-disaggregated data for London from 1801-1921, and a quantitative urban model to provide evidence on the determinants of the concentration of economic activity in metropolitan areas. Steam railways dramatically reduced travel times and hence permitted the first large-scale separation of workplace and residence to realize economies of scale. The researchers show that their model is able to account both qualitatively and quantitatively for the observed changes in city size, structure and land prices.

David Albouy, University of Illinois at Urbana-Champaign and NBER, and Arash Farahani, Independent Budget Office of the City of New York

Valuing Public Goods More Generally: The Case of Infrastructure

Albouy and Farahani examine the relationship between local public goods, prices, wages, and population in an equilibrium inter-city model. Non-traded production, federal taxes, and imperfect mobility all affect how public goods (or "amenities" more broadly) should be valued from data. Reinterpreting the estimated effects of public infrastructure on prices and wages in Haughwout (2002), the researchers find infrastructure over twice as valuable with their more general model. New estimates based on more years, cities, and data-sets indicate stronger wage and positive population effects of infrastructure. These imply higher values of infrastructure to firms, and also to households if moving costs are substantial.

Joshua A. Lewis, University of Montreal, and Edson R. Severnini, Carnegie Mellon University

Short- and Long-Run Effects of Rural Electrification: Short and Long Run Effects of the Roll-out of the U.S. Power Grid

Electrification among American farm households increased from less than 10 percent to nearly 100 percent over a three decade span, 1930-1960. Lewis and Severnini exploit the historical rollout of the U.S. power grid to study the short- and long-run impacts of rural electrification on local economies. In the short run, rural electrification led to increases in agricultural employment, rural farm population, and rural property values, but there was little impact on the local non-agriculture economy. Benefits exceeded historical costs, even in rural areas with low population density. As for the long run, rural counties that gained early access to electricity experienced increased economic growth that persisted for decades after the country was fully electrified. In remote rural areas, local development was driven by a long-run expansion in the agricultural sector, while in rural counties near metropolitan areas, long-run population growth coincided with increases in housing costs and decreases in agricultural employment. This last result suggests that rural electrification stimulated suburban expansion.

Matthew Turner and Marcel Peruffo, Brown University and NBER

Health Effects of Piped Water on Child Mortality in Brazil

Turner and Peruffo investigate the effect of the expansion of piped water availability that occurred in Brazil during 2001-3 as part of the Alvorada Program. Under this program municipalities received piped water on basis of their score on a historically determined UN measure of welfare, the 'Human Development Index'. Municipalities were eligible for funds under the program if and only their index score was below a threshold. The researchers exploit this natural experiment to evaluate the effects of piped water on child and infant mortality. They find that for an average Brazilian municipality, increasing by 1000 the number of households with municipal water connections reduces child mortality by about 1.5 per year, against a baseline mortality rate of 17 children per municipality per year. Using records of Alvorada program appropriations allows suggests that the cost of piped water provision to avert a child death is less than 30,000 2010USD.

Elaine Buckberg, Robert Mudge, and Hannah Sheffield, the Brattle Group

Recent Developments in the U.S. Public Private Partnership Market

Buckberg, Mudge and Sheffield illustrate the trends in today's rapidly growing P3 market and highlights reasons for the take off in alternative procurement. The researchers then present a menu of incentive structures for successful long-term risk sharing, and highlight key questions for designing a viable P3. In doing so, they draw on their experience gained in designing and advising on rate setting in European P3s as well as their work with regulated utilities in the U.S. and around the world.

Ryan D. Nunn, Brookings Institution

Economic Issues Raised by Recent U.S. Proposals for Infrastructure Investment

Aleksandar Andonov, Erasmus University Rotterdam; Roman Kräussl, University of Luxembourg; and Joshua D. Rauh, Stanford University

Infrastructure as an Investable Asset: An Investor Perspective

Andonov, Kräussl and Rauh investigate the characteristics of infrastructure as an asset class and focus on the perspective of the institutional investors who gain exposure to infrastructure assets primarily as limited partners (LPs) in infrastructure fund vehicles. They analyze a rich data set consisting of 3,316 unique infrastructure projects and 29,540 complete investor deals and study differences in financial performance across different types of institutional investor. The main finding is that public pension funds perform worse than other institutional investors in the infrastructure space, even after controlling for numerous asset-specific factors such as project stage, industry, geography and size of the deal. Specifically, US public pension funds are exposed to projects that have much worse exit rates, and the infrastructure funds they invest in achieve lower net IRRs and multiples of invested capital. These performance differentials occur even though the underlying projects appear quite similar on observables to those projects whose ultimate funders at the top of the chain are other types of LPs. Due to poor fund and project selection, it seems that the promise of infrastructure as an asset class has so far failed for US public pension funds.

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