Time Consistent Infrastructure Investments: Optimal Flood Protection Policies in Spatial Equilibrium

Place-based investments can have unintended general equilibrium effects and face challenges of time inconsistency. This paper simulates the granular impact of alternative spatial and temporal designs of such investments, using Quantitative Spatial Models where the strategy of the policymaker is endogenized, with time-consistent policy analysis or policies with commitment. It can apply to sunk, fixed costs investments in transportation infrastructure, levees, and other location-based investments. Applying this framework to the 1936 Flood Control Act, the largest investment in flood control infrastructure in US history protecting 5% of land, the study examines the general equilibrium effects of levee investments on housing prices, population density, and racial demographics over eight decades. Protected neighborhoods initially had lower property values, higher minority shares, and greater flood risk, but experienced sustained property appreciation and changes in population density. Structural analysis reveals that optimal levee designs prioritize high-density areas, reduce price capitalization, and minimize urban sprawl. Policymakers who cannot commit to long-term plans tend to overbuild and maintain larger systems compared to those with time-consistent strategies.