We study the relative importance of technology and institutions as factors determining the size of markets. The setting of 19th century Europe presents a unique opportunity to address this issue, since it witnessed fundamental change in both dimensions. First, Germany went from around 1,800 customs borders to none through the Zollverein customs treaties. Second, it moved from a situation of monetary disorder to currency unification. And third, the 19th century saw the introduction of steam trains, the key technology that revolutionized transportation between markets. Changes in market integration are studied in terms of the spatial dispersion of grain prices in 68 markets with more than 10,000 observations, located in five different countries and fifteen different German states. We find that the emergence of integrated commodity markets in 19th century Europe is in major part due to the transportation revolution in form of the railways. There is evidence that also customs liberalizations and, more so, currency agreements improved trade possibilities. However, the impact of trains was larger than the effect of these institutions: about three times larger over the long horizon, and around 50% larger for the relatively short time horizon of twenty-five years. These results suggest that as significant as institutional factors were for the expansion of markets, technology factors may have been even more important.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
13913.
Length: Date of creation: Apr 2008 Date of revision: Handle: RePEc:nbr:nberwo:13913
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Find related papers by JEL classification: F1 - International Economics - - Trade F3 - International Economics - - International Finance N10 - Economic History - - Macroeconomics and Monetary Economics; Growth and Fluctuations - - - General, International, or Comparative O24 - Economic Development, Technological Change, and Growth - - Development Planning and Policy - - - Trade Policy; Factor Movement; Foreign Exchange Policy O3 - Economic Development, Technological Change, and Growth - - Technological Change
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