Does Public Infrastructure Reduce Private Inventory?

31 Pages Posted: 21 Mar 2006 Last revised: 9 Feb 2009

See all articles by Richard K. Lai

Richard K. Lai

The Wharton School, Univ. of Pennsylvania

Date Written: June 15, 2006

Abstract

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.

Keywords: Inventory, public infrastructure, international comparison, instrumental variables

JEL Classification: D24, D82, M11, E32

Suggested Citation

Lai, Richard K., Does Public Infrastructure Reduce Private Inventory? (June 15, 2006). Available at SSRN: https://ssrn.com/abstract=892267 or http://dx.doi.org/10.2139/ssrn.892267

Richard K. Lai (Contact Author)

The Wharton School, Univ. of Pennsylvania ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States
215 898 1630 (Phone)

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