Road Maintenance and Local Economic Development: Evidence from Indonesia’s Highways
This paper estimates the local welfare impacts of road maintenance investments. We instrument road quality exploiting Indonesia’s two-step budgeting process for allocating funding to local road authorities. Using comprehensive data on road quality from 1990-2007, we find that better roads help manufacturers create new jobs, enabling worker transitions out of informal employment, and increasing wages. In terms of cost of living, road quality reduces perishable food prices but also raises housing prices. We estimate the elasticity of household welfare with respect to road quality to be 0.16 and the benefit/cost ratio for road maintenance investments to be 2.8.
The authors thank seminar participants at UC Berkeley, Millennium Challenge Corporation, the RAND Corporation, University of Toronto, University of Ottawa, and the Joint Initiative for Latin American Experimental Economics (JILAEE) Seminar Series for helpful comments and suggestions. This work was generously supported by a USAID Economic Research Partnership Grant. All errors remain our own. The authors declare that they have no financial or material interests in the results of the paper. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.