Does Building Highways Reduce Traffic Congestion?

Abstract

In a seminal study, Duranton and Turner (2011) finds evidence that points to the existence of the fundamental law of highway congestion in the US. They build a causal model using an instrumental variable (IV) approach that yields an estimate of 1.03 for the elasticity of vehicle miles traveled (VMT) to the stock of interstate highways in US metropolitan areas. The result means that government efforts to alleviate traffic congestion by expanding capacity are likely to fail — any increase in the stock of highways is accompanied by a commensurate increase in VMT, leaving travel times unaffected. In this article, we explore the impact of unobserved heterogeneity on the fundamental law. We begin by using a simple partial equilibrium model to demonstrate how metropolitan statistical areas (MSAs) that are identical in most respects but have different initial congestion levels respond differently to added capacity due to individual differences. These differences in MSAs gives rise to heterogeneity in the elasticity of VMT to capacity. We derive conditions under which the elasticity decreases with the initial congestion level. We then revisit the empirical analysis in Duranton and Turner (2011) using the instrumental variable quantile regression (IV-QR) model due to Chernozhukov and Hansen (2005, 2006, 2008). The IV-QR model allows us to incorporate variation in the elasticity due to the presence of unobserved differences across MSAs. Moreover, it allows us to evaluate the impact of changes in the stock of interstate highways on the entire conditional distribution of VMT, not just the impact on the conditional mean as in Duranton and Turner (2011). The IV-QR estimates show that as predicted by the simple partial equilibrium model, the elasticity declines as one goes up the quantile ladder, being more than one at the lower quantiles and less than one at the higher quantiles. The median IV-QR estimate being close to one. The IV-QR model implies that among observationally identical cities, expanding road capacity can lower the number of cities experiencing severe congestion, although the mean or median congestion levels are likely to remain constant. We also estimate the impact of increased road capacity on the unconditional distribution of VMT using the generalized quantile regression (GQR) model due to Powell (Forthcoming). The GQR estimates mirror the IV-QR estimates, but their conclusions are starker at the upper quantiles: building highways have no statistically significant impact on VMT at the highest quantiles. The GQR results imply that building roads can lower the total number of cities having different observed characteristics experiencing severe congestion levels. We further explore the mechanisms that drive the empirical findings by running simulations using a spatial general equilibrium model with an extensive road network calibrated to the Greater Los Angeles (LA) Region. In the general equilibrium model, besides commute trips, consumers have to travel to different zones to acquire consumption goods. The model considers route choice in the network and mode choice. Building roads affect road traffic through three channels: the total amount of consumption, mode choice, and the substitutions among goods sold at different locations. We find that the elasticity of VMT to capacity in LA is 0.321, and the elasticity decreases consistently with the initial congestion level. We report the welfare effect and the changes in other travel-related variables. Our results have important policy implications in that they show that while building roads is unlikely to change the mean or median congestion level, it can reduce the number of cities experiencing high congestion levels.