In addition to being associated with reduced competition, such barriers to entry make it more difficult to achieve cost efficiencies. They make it more difficult to obtain return loads on international routes. They segment the market and decrease fleet utilization, thereby decreasing economies of scale and scope. Market segmentation may also dis-incentivize the introduction of more flexible and efficient load dispatch systems which would improve vehicle utilization and intensify competition. Reduced fleet utilization in turn makes it less profitable to invest in fuel saving practices and technologies, including newer, more-fuel efficient trucks which entail higher financing and depreciation costs. Moreover, the lack of effective competition may inhibit innovation designed to improve quality or reduce costs.<sup>8</sup> Because high markups dampen downward pressure on costs, inefficient firms survive, and the market fails to restructure around the most efficient providers.

The analysis of firm costs reveals additional issues which increase costs as well – in particular, traffic congestion, high wait times, and high informal payments. Finally, although we could find no evidence that road quality explains costs or prices directly, it is associated with greater average travel speeds, which are inversely related to prices, probably due to the costs of operating in congested traffic.

The impact of high trucking prices on international trade appears to be economically important. Given available estimates of the elasticity of trade with respect to transport costs, halving trucking prices on domestic routes to ports, for example, would reduce total transport costs to extra-regional destinations by between 13 and 22 percent, which would increase trade volumes by a similar percentage if the transport cost elasticity of trade were equal to 1.<sup>9</sup> Reducing trucking prices on intra-regional overland routes by one third through cost efficiencies could similarly increase regional trade.

Although it is beyond the scope of this paper to estimate the investments required to achieve potential cost savings in each of the areas identified, some – in particular reduced congestion costs – could require a sizeable investment in infrastructure. Others, such as reducing bottlenecks at borders and ports, would require improved sector governance and transport strategies, in addition to physical investments. Among all possible measures, those targeted at improved competition are likely to be among the most costeffective. As discussed in Box 1, liberalization of entry has generally been associated in other regions of the world with improved efficiency, quality, and pricing of trucking service.

In the next section of this paper, we describe the data and highlight key stylized facts. In Section 3, we econometrically estimate the main factors associated with firms’ cost structures; in Section 4, we estimate the relationship between costs, trucking route characteristics, and the degree of competition in order to test for general forms of imperfect competition. The final section concludes.

# **2.  DATA AND STYLIZED FACTS**<sup>**10**</sup>

In 2011-2012, the World Bank commissioned a survey of trucking operators serving important international trade routes for the Central American countries of Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, and Panama. The first such survey in Central America, it was designed to enable

> 8See, e.g., Aghion et al. (2003) and (2009) and EU (2013).

> 9Estimates by Limao and Venables (2000) and others range from 2-3.  However, as Novy (2012) shows, these elasticities tend to decline with distance between trading partners.

> 10Unless otherwise specified, all data presented henceforth in tables, figures, and text of this report are from the Central America Trucking Survey.

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