ABSTRACT: This paper estimates how road maintenance affects local economic development and welfare. We propose a new instrument for road quality driven by features of Indonesia’s two-step budgeting process for allocating funding to different road authorities. We find that higher road quality allows manufacturers to create new jobs, allowing workers to transition outside of informal employment. Better roads increase household income, consumption, land values, and they reduce perishable goods prices. Using a simple model, we find that a 10 percent increase in road quality increases welfare by 2.5 percent, on average, with larger gains for poor households in non-urban districts.

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