What Explains the Rising Price of Highway Infrastructure?

Abstract

The rising price to build transport infrastructure poses a challenge to governments. Our paper analyzes a period between 2005 and 2017, during which the price of highway construction increased by 68% on average across our 40 analyzed states. We consider six potential explanations for this increase: (1) labor compensation; (2) material input prices; (3) demand for higher quality roadways; (4) market concentration; (5) urban vs. rural roadway mileage; and (6) relative spending on maintenance and rehabilitation. After testing for possible heteroskedasticity, serial correlation, and endogeneity, this paper uses fixed-effects and random-effects models to evaluate the impact of these six factors on highway construction price growth. The results show that highway construction prices are largely influenced by changes in labor and material input prices as well as shifts in demand for higher quality roadways. The analysis suggests the presence of Baumol’s cost disease, a phenomenon in which labor compensation growth outpaces productivity growth, leading to price increases. This finding implies that the price to deliver highway infrastructure will continue to rise in accordance with increases in labor compensation unless significant productivity gains are achieved in the future. The results of this work provide new evidence to explain the rising prices to build highway infrastructure.