The Causal Effect of Infrastructure Investments on Income Inequality: Evidence from US States

Emma Hooper, Sanjay Peters and Patrick Pintus
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Emma Hooper: GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique
Sanjay Peters: Columbia University [New York]

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Abstract: Through utilizing US state-level data at annual frequency from 1976 to 2008, this paper documents a causal effect of infrastructure investments, specifically public spending on highways, on income inequality. The number of seats in the US House of Representatives Committee On Appropriations serves as a valid instrument to identify quasi-random variations in state-level spending on highways. When a given state gains an additional committee member, which is rather exogenous, new federal grants are allocated to that state, resulting in the state government slashing its investment expenditures on highways. In other words, a crowding-out effect of federal funding for state investment in highways is at play. The main contribution of this paper is to show that such committee-driven cuts in spending on highways cause an increase in income inequality within a two-year horizon. In addition, we show that wages paid for construction jobs correlate positively and strongly with spending on highways at the state level. This further provides suggestive evidence that the construction sector plays an important role in the transmission channel from a rise in state spending on highways to a reduction in income inequality.

Keywords: public infrastructure; highways; income inequality; US state panel data; instrument variable (search for similar items in EconPapers)
Date: 2018-05
New Economics Papers: this item is included in nep-tre
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Working Paper: The Causal Effect of Infrastructure Investments on Income Inequality: Evidence from US States (2018)
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