Closing the price gap – Von Thünen applied to wheat markets in 18th century Spain

The literature suggests that several factors, including trade costs, influence price formation. However, testing this hypothesis requires rich data, usually unavailable from historical sources. We use a large cadastre from 1749 to analyze wheat price formation in the Crown of Castile in the mid-18th century. We follow the logic of Von Thünen’s isolated markets, which closely resemble historical Spanish grain markets. We show and measure how trade costs heavily determine wheat prices. Accounting for spatial autocorrelation, we observe important spatial effects around the capital. We divide the sample between the interior and the periphery, showing that determinants of price formation do not work well around Madrid, suggesting that the political intervention of grain markets around the capital acted as a potential significant disruptor.