Does Public Infrastructure Reduce Private Inventory?

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? The author develops as a baseline a "Substitution hypothesis," which predicts that infrastructure reduces inventory. The author also considers competing hypotheses that can explain negative correlation between infrastructure and inventory. To empirically distinguish these hypotheses, the author uses data on public firms from 60 countries. The econometric challenge is in identifying the exogenous component of infrastructure changes.