Firm inventory behavior and the returns from infrastructure investment

Economists have identified a decline in infrastructure investment as a possible factor in the productivity growth slowdown of the past three decades but have struggled to rigorously link this investment with changes in economic activity. This work develops a theoretical model that relates firm-level logistics behavior and road and highway investment through freight transportation cost and service. Simulations using this model with representative product data find benefits from reductions in business logistics costs of $57 billion annually, representing a rate of return of 16.5% on the investment in the Interstate Highway System from this source of benefits. Econometric estimation of the relationship between plant-level inventory levels and road and highway public capital stock data yields smaller benefits of $5 billion to $10 billion per year in logistics costs reductions from the subsequent 15 year period of investment in highway infrastructure starting in 1972. This more moderate 10% rate of return is similar in magnitude to recent estimates in the literature. The econometric estimation also finds that a significant portion of benefits from highway infrastructure investment spill over state boundaries. Other variations in the effect of road and highway infrastructure investment over time, place, or by industry are also considered. Recent statistics on inventories are then discussed in light of these results and compared with popular perceptions of inventory trends and determinants. Further regression analysis finds evidence of other influences on inventory behavior, including a moderate effect from the variability of demand and a substantial effect from trucking deregulation. Results from this exploration also raise the possibility that increases in product variety may have offset some of the reductions in inventory holdings otherwise made possible by improvements in freight transportation.