Roads to Prosperity or Bridges to Nowhere? Theory and Evidence on the Impact of Public Infrastructure Investment

We examine the dynamic macroeconomic effects of public infrastructure investment both theoretically and empirically, using a novel data set we compiled on various highway spending measures. Relying on the institutional design of federal grant distributions among states, we construct a measure of government highway spending shocks that captures revisions in expectations about future government investment. We find that shocks to federal highway funding has a positive effect on local GDP both on impact and after 6 to 8 years, with the impact effect coming from shocks during (local) recessions. The direct channel appears to stem from federal grants leading to increased state government spending, and we provide strong evidence of this "flypaper effect."