The Tyranny of the Ribbon: The Effects of Prioritizing New Infrastructure over Maintenance

Abstract

In the allocation of resources toward public infrastructure, spending on maintenance is typically neglected. Using a heterogeneous agent model, we find that reallocating funding away from new infrastructure investment and toward maintenance raises the effectiveness of existing public infrastructure and thus yields gains in GDP and in aggregate welfare. Richer households experience larger welfare gains than poorer households. A reallocation that takes funding away from maintenance is found to have adverse effects on GDP and aggregate welfare. Raising new funding with taxation yields larger positive benefits if this additional spending is divided between maintenance expenditures and investment in new infrastructure. Giving in to the “Tyranny of the Ribbon” by policymakers, that is, raising new funding to be spent only on new infrastructure, is shown to be the worse option.