# **1 Introduction**

There are many benefits associated with investments in transport infrastructure which can stimulate growth through trade, structural transformation, agglomeration and productivity (see Redding and Turner, 2015, and Berg el al., 2017 for surveys). The impacts can be large: Calderón, Moral-Benito and Servén (2009) estimate that a 10 percent improvement in the stock of infrastructure (including transport infrastructure) increases per capita gdp by 0.7 to 1 percent. In Latin America, in particular, the potential to stimulate growth through transport investments could be especially significant given the large infrastructure gap in most Latin American countries (see Fay and Morrison, 2007; Gonzalez, Guasch and Serebrisky, 2007). Perrotti and Sánchez (2011) estimate that ’closing the infrastructure gap’ in Latin American countries would require investments in the amount of up to 6.2 percent of annual GDP for the period 2012- 2020. In theory, benefits could then materialize in the form of a reduction in transportation costs (or travel time), more intense competition, and deeper economic integration. Locations where access to markets is improved would become more attractive for firms, potentially triggering a process of concentration and specialization of local economic activity whereby innovation, the sharing of input markets, and improved matching on the labor market would increase productivity, and in turn lead to local economic development and an increase in living standards.

In this paper, we focus on the first steps in this potential chain of events, in the case of Mexico, a country which experienced relatively large investments in roads over the past decades and from which lessons could be derived for the rest of the continent. In Mexico, road transport accounts for 57% of freight transport and remains a vital component of the economy. The Mexican road network links the country from north to south and between its two oceanic coastlines; and some of the most important road connections link the capital city with border crossings to the US. We investigate the extent to which these road improvements increased access to markets and, in turn, affected the location of economic activities.

Our paper contributes to a growing literature that looks at the effect of transport infrastructure on local economic development outcomes (Donaldson and Hornbeck, 2015; Duranton and Turner, 2012; Michaels, 2008; Baum-Snow, 2007; Baum-Snow et al., 2017; Jedwab and Storeygard, 2016; Alder, 2016; Alder, Robert and Tewari, 2017; Straub and Bird, 2015, Ghani et al., 2015; Faber, 2014; Rothenberg, 2015, Fyre, 2015; Galasso and Oettl, 2017). In view of this literature, our paper looks at the effects of roads on the geographical concentration of economic activities and the specialization of localities.

There are two challenges to estimate the causal impact of roads on local economic outcomes: the non-random placement of roads, and the recursion problem inherent in regression of economic outcomes on market access measures. To address these two we problems, adopt three separate identification strategies. First, we use the so-called ’doughnut’ strategy, which 1