Economic Impacts, Costs and Benefits of Infrastructure Investment— Review of the Literature

This paper reviews literature on the impacts, costs, and benefits of infrastructure in the United States and developing countries, focusing on studies published since the early 1990s. A review of 28 econometric studies of productivity impacts of public capital in the United States found a wide range of estimates of the output elasticity of public capital (a measure of the percent increase in the value of output associated with a one percent increase in the value of the public capital stock) – ranging from -0.49 to +0.56, with a mean value of 0.12. The range of estimates depends on the unit of analysis, the type of public capital, and the method of analysis. Generally larger productivity impacts were found in national than in state-level studies and for water and sewer capital than for highway capital. Smaller impacts were found in studies that controlled for state-level fixed factors that affect productivity. These estimates imply an even wider range of estimates of the marginal rate of return to public capital stocks, ranging from close to zero for highway stocks to nearly 90 percent for water and sewer capital. Similarly large ranges of rates of return were estimated by studies investigating impacts of public capital on the costs or profits of firms. A few studies estimated the benefits of public capital stocks in U.S. cities including amenity benefits, and found that such benefits can be larger than the productivity benefits. The benefit-to-cost ratio (BCR) of public capital stocks estimated in these studies ranged from about 0.3 to greater than 2.0, depending on the assumptions of the econometric framework. Many econometric studies have investigated impacts of particular types of infrastructure in the U.S. and in developing countries, though few have estimated rates of return implied by the estimates. Model-based estimates of BCRs of infrastructure investments by the U.S. Army Corps of Engineers and the Federal Highway Administration suggest that BCRs greater than 1.0 are common for water and highway infrastructure projects, but no evidence was found in the literature reviewed that these have been validated using econometric approaches. Rigorous econometric impact evaluation methods to assess the causal impacts of infrastructure investments have been used by the Millennium Challenge Corporation and multilateral development banks to validate and improve the results of predictive models in some developing country contexts and have found some statistically significant impacts on railroads, roads, rural electrification, water and information and communication technologies (ICTs). Such an approach could be useful to apply in more contexts.