About 15 percent of the world’s urban population lacks safe drinking water and 40 percent lacks safely managed sanitation services, putting lives at risk.1 But despite their critical importance, piped water and sewer access are understudied compared with other basic needs such as transportation and electricity generation.

For their paper, “The Value of Piped Water and Sewers: Evidence from 19th Century Chicago,” Michael Coury of the University at Buffalo, Toru Kitagawa and Matthew Turner of Brown University, and Allison Shertzer of the Philadelphia Fed applied a novel approach for estimating the benefits of these public goods. They relate their findings to the value of large infrastructure projects elsewhere and to piped water and sewer needs in cities in the developing world today.

In the second half of the 19th century, Chicago was one of the fastest-growing cities in the world. Not even the Great Fire of 1871, which burned down much of Chicago’s central business district and beyond, could slow this growth. As new residents arrived from elsewhere in the United States and from Europe, Chicago’s population ballooned from about 300,000 in 1870 to more than 1 million by 1890. Growth was especially strong in the band of mostly unsettled land a few miles from the downtown, which is the focus area of their study.

Population growth comes with problems, including the need to expand piped water and sewer access to help fight disease. From 1852 to 1854, for example, Chicago experienced epidemics of cholera and dysentery from sewage runoff into Lake Michigan and private wells. These epidemics killed hundreds of people and sickened many more. In response, plans for expanded piped water and sewer access were initiated, and the need for these services only grew as Chicago’s population expanded. This historical experience, the authors write, resembles the experience of many cities in developing Asian and African countries today.

By using land values, the authors created a novel approach for estimating the benefits of Chicago’s 1874–1880 expansion of piped water and sewers. Their method, “a comprehensive revealed preference measure of value,” has the advantage of not relying on measures of human life and health. It also avoids the difficulties of isolating the health benefits of sewers and water lines from the benefits of other health-related advances such as increased vaccination rates and improved food safety laws. For this study, they used data from annual maps of piped water and sewer networks and historical records on land acquisitions and construction costs.

To estimate the benefits, they relied on a spatial discontinuity that affected the timing of the installation of water pipes and sewers. Specifically, parcels south of Congress Street received water and sewer services about three years after those to the north because of elevation variations in the south that increased construction costs and delayed project completion. (Sewers and water lines, they write, were almost always installed together.)

Using their value of piped water and sewer access, the authors develop a new estimator that can be applied to other projects — or, as they put it in more technical language, they “propose a technique for the principled extrapolation of treatment effects from a quasi-experimental study area to an area that is more relevant for economic analysis.”2

They find a high value for piped water and sewers when compared with the project’s construction costs, other infrastructure projects, and even measures valuing averted deaths. Specifically, piped water and sewer access more than doubled land prices.3 This finding, based on land values, provides a useful method for assessing the project’s benefits. (Causality can be difficult to pinpoint using health indicators instead.)

Reflecting the trends in land values, the average household paid about 36 percent of their income for a parcel with piped water and sewer access, compared with 12 percent for a parcel without access. The authors also show that the value of piped water and sewer expansion was about 62 times greater than its cost. The ratio of benefits to costs of Chicago’s 1874–1880 expansion of piped water and sewer access exceeds that of some other well-known projects, such as the Metro Rail in Los Angeles and the Bus Rapid Transit System (TransMilenio BRT) in Bogotá, Colombia.

But their work does more than contribute to our understanding of the historical development of the American economy; it also has relevance today. Urban policymakers in the developing countries of Latin America and Africa, for example, face an unavoidable trade-off in the provision of basic services — not only of piped water and sewers but also of roads, public transport, schooling, and electricity. These policymakers, the authors suggest, could use their estimator to help them identify which basic services might have the greatest development impact.4

  1. The views expressed here are solely those of the author and do not necessarily reflect the views of the Federal Reserve Bank of Philadelphia or the Federal Reserve System.
  2. These data are from the World Health Organization’s “Progress on Sanitation and Drinking Water: 2015 Update and MDG Assessment,” available at www.who.int/publications/i/item/9789241509145.
  3. Their work on marginal treatment effects builds on the work of Pedro Carneiro, James Heckman, and Edward Vytlacil, “Evaluating Marginal Policy Changes and the Average Effect of Treatment for Individuals at the Margin,” Econometrica, 78:1 (2010), pp. 377–394; and of James Heckman and Edward Vytlacil, “Structural Equations, Treatment Effects, and Econometric Policy Evaluation,” Econometrica, 73:3 (2005), pp. 669–738.
  4. Wages and business cycle variations, they found, contributed even more to land price valuations.
  5. Although their extrapolation technique may help inform policy, they caution that their results are based on data from 19th century Chicago, where the disease environment was different from that in modern developing cities. Thus, the authors suggest, localized studies are more desirable. For more on this topic, see John Henderson and Matthew Turner, “Urbanization in the Developing World: Too Early or Too Slow?” Journal of Economic Perspectives, 34:3 (2020), pp. 150–173.