The Effect of Traffic Congestion on Labour Investment Efficiency

ABSTRACT The study examines the effects of headquarters‐city traffic congestion on labour investment efficiency. The results indicate that firms headquartered in congested cities may engage in inefficient labour investment decisions. Further analysis indicates that the inefficiency is associated with both overinvestment and underinvestment in labour. The results suggest that the effect of traffic congestion on net hiring may be induced by managerial preference for empire building. The results remain robust to endogeneity concerns. In sum, the study underscores traffic congestion as a novel external determinant of corporate investment policy.