Highway Costs and the Efficient Mix of State and Local Funds

Transportation networks and governments are both hierarchically organized. In some states most highways are financed by state governments, while in other states similar roads are financed locally. Larger governments attain scale economies. However they also tend to be more bureaucratic and have higher operating costs, all else equal, due to problems such as span of control. This study relates highway expenditure with share of expenditure by state government so that a basis for determining how governments should share expenditure on all roads in a state to attain efficiency in highway costs. For each state three different costs are considered: capital outlay, operations and maintenance, and total costs. Two government layers are considered: state (including federal contributions) and local government. A series of regression models to predict different highway expenditures as a function of utilization, capacity, and funding shares are estimated. We find that there is a share of expenditures by each level of government which results in a minimum expenditure for each funding category (capital, operating). That minimum is not very far from typical state/local mixes found in many states. The results of this study can be applied in formulation of efficient network financing arrangements. Policies can be formulated that can help adjust the financial responsibilities of transportation networks between government layers.