Does Public Infrastructure Reduce Private Inventory?
Richard K. Lai
The Wharton School, Univ. of Pennsylvania
June 15, 2006
The discipline of operations management is rarely studied with an eye on public policies. Yet, it is glaring to even the casual observer that public infrastructure is very different in different countries. How does public infrastructure affect private sector inventory levels? I develop as a baseline a substitution hypothesis, which predicts that infrastructure reduces inventory. I also consider competing hypotheses that can explain negative correlation between infrastructure and inventory. To empirically distinguish these hypotheses, I use data on public firms from 60 countries. The econometric challenge is in identifying the exogenous component of infrastructure changes. I address that using instrumental variables consisting of physical attributes of countries - such as their elevation, whether they are land-locked, their mean distance to a coast or river. I find evidence consistent with the substitution hypothesis. This finding is robust to many tests.
Number of Pages in PDF File: 31
Keywords: Inventory, public infrastructure, international comparison, instrumental variables
JEL Classification: D24, D82, M11, E32working papers series
Date posted: March 21, 2006 ; Last revised: February 9, 2009
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