Welfare Effects of Congestion in Luxembourg and the Greater Region

This paper studies the effects of congestion relief in a spatial general equilibrium model of Luxembourg and its cross-border commuting zone. Using traffic speed data, we apply a difference-in-differences design on Luxembourg's highways to measure congestion severity and identify choke points. We then simulate counterfactual scenarios where highway speeds are set to free-flow levels and track the resulting changes in output, welfare, and fiscal revenues. Economic output rises in Luxembourg City and Esch, while other cities lose production but gain in resident welfare. For residents of Luxembourg City, we estimate a short-run welfare loss of EUR1,140 per person per year, which becomes a welfare gain of EUR3,490 in the long run after population reallocation. When accounting for migration from the outside economy, the welfare effect in Luxembourg City turns negative at EUR8,110 per person per year. The elimination of congestion induces a fiscal gain of EUR2.50 billion per year in the short run, e1.18 billion in the long run, and e7.04 billion when accounting for migration inflows.