Empirical analysis of transportation investment and economic development at state, county and municipality levels

Numerous studies have found positive correlation between transportation infrastructure investment and economic development. Basically these studies use a conventional production function model augmented by a public capital input, mainly highways, rail and other transportation facilities. While the range of the measured economic growth effects varies widely among studies, the positive elasticity between transportation investment and economic development is now commonly accepted. Still a major puzzling issue is that the magnitude of the measured effect seems to decline significantly as the econometric model is further refined, mainly with regard to space and time lags. That is, the use of national or state data produces elasticity results, which are much larger than when using county or municipality data. Similarly, when we introduce into the econometric model a lag between the times when the transportation investments are made and when the economic benefits transpire, the measured elasticities decline with the size of the lag. Thus, the main objective of this paper is to investigate these issues analytically and empirically and provide a plausible explanation. We do so by using alternative econometric models, applying them to a database, which is composed of longitudinal state, county and municipality observations from 1990 to 2000. The key result is that transportation investments produce strong spillover effects relative to space and time. Unless these factors are properly accounted for many reported empirical results are likely to be overly biased, with important policy implications.