Nber Working Paper Series Railroads and American Economic Growth: a “market Access” Approach

This paper examines the historical impact of railroads on the American economy. Expansion of the railroad network may have affected all counties directly or indirectly – an econometric challenge that arises in many empirical settings. However, the total impact on each county is captured by changes in that county's “market access,” a reduced-form expression derived from general equilibrium trade theory. We measure counties' market access by constructing a network database of railroads and waterways and calculating lowest-cost county-to-county freight routes. As the railroad network expanded from 1870 to 1890, changes in market access were capitalized into county agricultural land values with an estimated elasticity of 1.1. County-level declines in market access associated with removing all railroads in 1890 are estimated to decrease the total value of US agricultural land by 64%. Feasible extensions to internal waterways or improvements in country roads would have mitigated 13% or 20% of the losses from removing railroads. Dave Donaldson MIT Department of Economics 50 Memorial Drive, E52-243G Cambridge, MA 02142-1347 and NBER [email protected] Richard Hornbeck Department of Economics Harvard University 232 Littauer Center Cambridge, MA 02138 and NBER [email protected] During the 19th century, railroads spread throughout a growing United States as the economy rose to global prominence. Railroads became the dominant form of freight transportation and areas around railroad lines prospered. The early historical literature often presumed that railroads were indispensable to the United States’ economy or, at least, very influential for economic growth. Our understanding of the development of the American economy is shaped by an understanding of the impact of railroads and, more generally, the impact of market integration. In Railroads and American Economic Growth, Fogel (1964) transformed the academic literature by using a “social saving” methodology to focus attention on counterfactuals: in the absence of railroads, freight transportation by rivers and canals would have been only moderately more expensive along most common routes. Fogel argued that small differences in freight rates caused some areas to thrive relative to others, but that the aggregate economic impact of railroads was small. This social saving methodology has been widely applied to transportation improvements and other technological innovations, though many scholars have discussed both practical and theoretical limitations of the approach (see, e.g., Lebergott, 1966; Nerlove, 1966; McClelland, 1968; David, 1969; White, 1976; Fogel, 1979; Leunig, 2010). There is an appeal to a methodology that estimates directly the impacts of railroads, using increasingly available county-level data and digitized railroad maps. Recent work has compared counties that received railroads to counties that did not (Haines and Margo, 2008; Atack and Margo, 2010; Atack et al., 2010; Atack, Haines and Margo, 2011), and similar methods have been used to estimate impacts of railroads in modern China (Banerjee, Duflo and Qian, 2012) or highways in the United States (Baum-Snow, 2007; Michaels, 2008). These studies estimate relative impacts of transportation improvements; for example, due to displacement and complementarities, areas without railroads and areas with previous railroads are also affected when railroads are extended to new areas. This paper develops a methodology for estimating aggregate impacts of railroads on the American economy, maintaining Fogel’s focus on the agricultural sector. We argue that it is natural to measure how expansion of the railroad network affects each county’s “market access,” a reduced-form expression derived from general equilibrium trade theory, and then to estimate how enhanced market access is capitalized into each county’s value of agricultural land. A county’s market access increases when it becomes cheaper to trade with another county, particularly when that other county has a larger population and higher trade costs with other counties. In a wide class of multiple-region models, changes in market access One alternative approach is to create a computational general equilibrium model, with the explicit inclusion of multiple regions separated by a transportation technology (e.g., Williamson, 1974; Herrendorf, Schmitz and Teixeira, 2009). Cervantes (2013) presents estimates from a calibrated trade model.