Evidence of American Railways in the 19th Century

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This blog is part of a series of articles published this year by doctoral students on the labor market.

The last decades have been characterized by a high degree of trade integration, accompanied by an increase in income and wealth inequalities. A growing body of work has argued that increased exposure to trade can have heterogeneous effects across households. What is the impact of falling trade costs on inequalities?How does the level of financial development affect the response of inequalities to falling trade costs?

In my article on the labor market, I answer these questions from a historical perspective. I study the effects of falling trade costs on wealth inequalities using the expansion of the rail network in the United States in the 19th century as an empirical laboratory. Railroad mileage increased from 9,000 miles in 1850 to about 50,000 miles in 1870 (Figure 1). The expansion of the rail network is a natural empirical framework for studying the effect of trade costs, as railways have significantly reduced the cost of moving freight in the United States. Railways were an order of magnitude cheaper compared to shipping freight. The 19th century in the United States is also an ideal setting for studying wealth inequalities due to the availability of wealth data for all households. The newly digitized comprehensive censuses of 1850, 1860, and 1870 provide data on real estate wealth for every individual in the United States, and the 1860 and 1870 censuses provide data on real estate and personal wealth.

Figure 1: The American rail network in 1850 and 1870

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According to Donaldson and Hornbeck (2016), a county’s market access is defined as a sum weighted by trade costs on the populations of all other counties, and it captures how cheaply goods can be transported from this county to all trading partners. A county has better market access when it is cheaper to trade with another county, especially when that other county has a larger population. The expansion of the rail network across the country has significantly reduced trade costs and thus increased the counties’ access to other markets. While railroad construction is potentially endogenous and may depend on local economic conditions, changes in county market access are primarily due to changes in the rail network elsewhere, rather than railroad construction. local iron. The identifying assumption is that counties with relative increases in market access would otherwise have changed in the same way as neighboring counties.

I believe that the increased market access at the county level brought about by the expansion of the rail network has led to a significant increase in wealth inequalities at the county level. From 1850 to 1870, a one standard deviation increase in county market access results in a 0.023 point increase in the Gini coefficient and a 3.24 percentage point increase in the 10% share of real estate wealth. the most rich. This result is robust to using different measures of wealth inequality, controlling for time varying county characteristics, and adjusting for the effects of civil war and westward migration.

I then show that a dynamic general equilibrium model featuring heterogeneous households, entrepreneurship, financial frictions and trade can rationalize this result. Railways are modeled as a device that leads to lower commercial costs. I calibrate the model to match the data times in the United States in 1850. I use the calibrated model to study how the expansion of the rail network affected income, wealth, and inequality. Income and wealth are higher in the economy with lower trading costs. Lower trade costs lead to larger gains at the top of the distribution, increasing both income and wealth inequalities. My calibrated model shows that the empirically observed reductions in average trade costs can explain around 60% of the observed increase in the share of real estate wealth of the richest 10% between 1850 and 1870.

Two key channels result in the differential effect of falling trade costs on the distribution of wealth in the model. First, like Melitz (2003), increased exposure to trade prompts high productivity entrepreneurs to export, while at the same time forcing less productive entrepreneurs who were marginally profitable before the railroads to quit. This selection mechanism reallocates market shares and therefore income to more productive (and richer) households. Second, financial frictions skew household decisions on the extensive margin by reducing the number of households that choose to be entrepreneurs and exporters. This happens because these choices require high levels of wealth to operate on a profitable scale. Financial frictions also affect the decisions of households on the intensive margin by skewing their scale of production. When business costs fall, constrained entrepreneurs who hope to take advantage of increased business opportunities face a relatively higher cost than unconstrained (richer) entrepreneurs.

I validate the model by checking that its implicit predictions are consistent with the empirical results. First, there is a reallocation of wealth to the wealthiest households. The implicit response of the model of wealth shares held by different parts of the distribution to a fall in trade costs is quantitatively consistent with the empirical results (Figure 2). Second, financial frictions prevent poorer households from benefiting from falling trade costs. The effect of lower trade barriers on inequalities is mitigated in a more financially developed economy. My empirical results indicate that the impact of market access on the wealth share of the richest 10% is lower in states with higher existing financial development , as measured by the number of banks per capita, the amount of loans or the amount of bank capital in 1850. This result is consistent with the idea that greater availability of credit can help low-income people benefit from increased economic opportunities.

Figure 2: Effects of trade costs on the distribution of wealth

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In terms of welfare, I find that most households in the model economy benefit from the lower trade costs induced by the railroad. The average household earns 0.65% in consumption equivalent units. Falling trade costs raise wages, which benefits both the poor and the rich by allowing them to increase production and enter the export market.

My estimates show that lower trade costs promote economic growth, but at the cost of greater inequality. My results also suggest that, in the presence of credit constraints, the effect of increased trade openness on the distribution of wealth depends on the financial development of the economy . My quantitative framework can be used to study tax policies that can ease the growth / inequality trade-off and ensure equitable growth in the face of falling trade barriers.

The references

Donaldson, D. and Hornbeck, R. (2016). Railways and US Economic Growth: A “Market Access” Approach. The Quarterly Journal of Economics, 131 (2): 799-858.

Mélitz, MJ (2003). The impact of trade on intra-industry reallocations and overall industry productivity. Econometrica, 71 (6): 1695-1725.


Dheeraj Chaudhary is a doctoral candidate in economics at the University of Maryland. To learn more about his research, click here.

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World Bank Group published this content on 06 December 2021 and is solely responsible for the information it contains. Distributed by Public, unedited and unmodified, on 06 December 2021 05:11:04 PM UTC.

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