The (Rail)road to Structural Change: Transportation Costs, Integration and Production Specialization in a Regional Economy

The current paper examines whether or not reductions in transportation costs characterize long-run patterns of production specialization in a regional economy, and the possible welfare effects of these patterns on price convergence and wage dispersion. In answering this question I exploit a natural experiment in the Austro-Hungarian (or ”Habsburg”) Empire, where massive railroad development occurred throughout the latter half of the 19th century and into the early 20th century. Summary statistics suggest that throughout this period regional production patterns emerged, with some regions specializing in industrial production and others in more agrarian goods. To provide intuition, I sketch a 2 x 2 Ricardian model of trade with transportation costs and examine trends in regional specialization patterns, prices, and wages as a result of decreasing transportation costs. The paper contributes to the literature on infrastructure and economic development by using an instrumental variables approach to addressing simultaneity biases inherent in these estimations. The results show strong support for price convergence and wage dispersion as a result of decreasing transportation costs, and moderate support for regional specialization in industrial goods.