Highways, local economic structure and urban development

Transport costs are widely considered as a key driver of competitive advantage of countries, regions and cities. Their relevance is even greater when scale economies are at work since production is concentrated and goods must be shipped. Recent literature has found that highways, by decreasing transport costs, are crucial in influencing agglomeration economies and ultimately urban development. In this article, we contribute to this literature by studying the effect of highway construction on the structure of local economies. In particular, we consider the effect of highways in Italian cities in terms of firm location by explicitly recognizing the pivotal role played by the transport sector and by intersectoral linkages in promoting development. The main research hypothesis is that the location of an highway exit in a given city attracts firms operating in the transport service sector and consequently transport-intensive firms. Our empirical evidence concerns Italian cities over the period 1951-2001 and exploits variation in employment, population and plants induced by the construction of the highway network. To deal with the endogeneity of the geography of highways exits, we propose as an instrument the geography of Roman roads. To this end, we have coded the whole network of Roman roads in Italy. We have found that the location of highway exits increases employment and the number of plants and that this growth is concentrated in transport service-intensive sectors. This result is robust to a number of checks, including eventual instrument non-validity and selection into treatment.