The Welfare Effects of Transportation Infrastructure Improvements

Treb Allen, Costas Arkolakis

NBER Working Paper No. 25487
Issued in January 2019
NBER Program(s):The Program on the Development of the American Economy, The International Trade and Investment Program

We develop a general equilibrium geographic framework to characterize the welfare effect of transportation infrastructure investments. We tackle three distinct but conflating challenges: First, we offer an analytical characterization of the routing problem and, in particular, how infrastructure investment between any two connected locations decreases the total trade costs between all pairs of locations. Second, we characterize how this cost reduction affects welfare within a standard general equilibrium geography setup where market inefficiencies arise due to agglomeration and dispersion spillovers. Finally, we show how our framework admits analytical characterizations of traffic congestion, which creates a critical – albeit tractable – feedback loop between trade costs and the general equilibrium economic system. We apply these results to calculate the welfare effects of improving each of the thousands of segments of the U.S. national highway network. We find large but heterogeneous welfare effects, with the largest gains concentrated in metropolitan areas and along important trading corridors.

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Document Object Identifier (DOI): 10.3386/w25487

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