This dissertation is composed of three chapters, all related to the effects of highway spending. By considering the construction of the Interstate Highway System (IHS), Chapter 1 asks how big, if any, are returns to constructing new highways? I find that the biggest threats to identification are endogeneity and anticipation. To overcome endogeneity I note that a state’s initial population and area shares played an important role in determining the assignment of interstate highway funds. To overcome the anticipation I use news to identify the timing of shocks. I combine my solutions in an IV local projection framework, as in Ramey and Zubairy (2018), and estimate a cumulative relative multiplier of 1.8 and a discounted relative multiplier of 2.3 at the 15 year horizon. I then extend my specification to allow for spillover effects, and find evidence of zero spillovers across states.

Chapter 2 asks what is the relation between the relative and the aggregate multiplier from transportation spending? If we take as given a relative multiplier of 1.8 and no across-state spillovers from highway spending, what can we say about the aggregate multiplier? To answer this question, I build a multi-region model that captures two key mechanisms from building highways: (1) bilateral trade costs decrease, which leads to positive spillovers; and (2) TFP shifts up, which leads to a factor-stealing effect and negative spillovers. When only one region is shocked, positive and negative spillovers can cancel each other out. The calibrated model predicts an aggregate multiplier of 2.54.

Finally, Chapter 3 provides evidence of the popular belief that incumbent parties can attract votes by increasing government spending. A simple OLS analysis provides a downward biased estimate of this relationship as incumbents target spending on areas where they are less popular. To overcome this problem I employ an IV methodology that exploits the 1947 plan of the IHS. I find that receiving one extra highway mile causes the share of votes to the gubernatorial incumbent party to increase by 0.65 percentage points.