Valuing Incremental Highway Capacity in a Network

The importance of increments to an existing highway system depends upon the values they add to the pre-existing network. Over 50 years ago, Mohring [1965] suggested this logic for planning optimal highway investment programs. Moreover he argued it could be implemented by measuring the quasi-rents generated by specific additions to an existing roadway system. To our knowledge no one has managed to apply his ideas. This paper uses a unique set of additions to a loop roadway in metropolitan Phoenix, together with detailed records of housing sales over the past decade, to meet this need. We find that the capitalized value of four segments added during this period range from 54 to over 350 million dollars per mile of the roadway addition. These differences suggest there is significant potential for using this strategy in prioritizing highway projects. Our analysis also exploits the ability to identify distinct subdivisions to develop a two-step method, analogous to the Athey-Imbens [2006] difference-in-difference estimator, which provides an economically consistent measure of capitalization integrating Starrett’s conditions for full internal capitalization into the design of the estimator.