Roads to Development: Experimental Evidence from Urban Road Pavement∗

Urban peripheries in many developing country cities lack basic local public goods like pavement, water, sewerage and electricity. We estimate the impacts of slum infrastructure upgrading using an experiment in urban road pavement provision in Mexico. Our findings show that homes in streets that were paved increased their value between 13 and 24%. Households living in streets that were paved obtained more credit, had higher per capita expenditures, increased motor vehicle ownership and were more likely to have made home improvements. The rate of return to road pavement is estimated to be 2% without considering externalities, but raises to 55% once externalities are accounted for. We also present a model to understand the experimental estimates. Increases in consumption are more strongly correlated with increases in housing value than reductions in transportation costs, suggesting that the wealth effect generated by the road pavement was a stronger driver of consumption than the reduction in transportation costs. JEL: C92, C93, H41, O15, O12 ∗We would like to thank Anne Case, Angus Deaton, Alan Krueger, David Lee, Adriana Lleras-Muney, Sam Schulhofer-Wohl, Christina Paxson, and Cecilia Rouse for their help and advice in this research project. The collaboration of the Acayucan 2005-2007 and 2008-2010 Municipal administrations is gratefully acknowledged. We also recognize the effort of José Luis Palma, Luz Uribe and Monica González at INSAD who were in charge of the survey. Financial aid from Princeton University, Princeton Woodrow Wilson Scholars, Princeton Industrial Relations Section, Princeton Research Program in Development Studies, Robert Wood Johnson Scholars in Health Policy Research Program, Universitat d’Alacant, the Lincoln Institute of Land Policy and the Spanish Ministry of Science and Innovation (ECO 2008-05721/ECON) is gratefully acknowledged. Any errors contained in the paper are our own. †50 University Hall, MC 7360 Berkeley, CA 94720. Email: [email protected] ‡Departament de Fonaments de l’Anàlisi Econòmica, Universitat d’Alacant, Sant Vicent del Raspeig, 03690 Alacant, Spain. Email: [email protected]