Development Derailed: Policy Uncertainty and Coordinated Investment

We quantify the sensitivity of investments to policy uncertainty by drawing on the Northern Pacific’s massive land grant and the ensuing political battle that generated significant uncertainty to title from 1879 to 1894. Focusing on irrigation because of its high asset specificity, our analysis exploits the spatially exogenous extent of the grant to identify causal effects on investment, inclusive of spillovers to secure land because coordinated investment is generally necessary to capture the scale economies of irrigation. We find that the uncertainty significantly deterred and delayed irrigation investment in Montana, which lowered the state’s economic activity by up to 5 percent.