How Important was the 19th Century Transportation Revolution for U.S. Development?

Standard models of economic development typically ignore geography and transport. In this paper, we argue that we should model the transport sector, as it plays a quantitatively important role.\\ To understand what will determine the importance of the transport sector, consider the transport between two points that trade. An improvement in the transport system will lead to a decline in the relative price (between the regions) of each transported good. For example, if food is traded between the two regions, then transport improvements will lead to a decline in the price of food in the food-importing region relative to the price of food in the food-exporting region. The benefits of this transport improvement will depend on (i) how much the relative price falls; (ii) how many goods are traded; (iii) how different the production functions are across regions; (iv) how substitutable the traded goods are.\\ We explore the U.S. transport revolution during 2. half of the 19th century. There are two reasons why this is a good example. First, we have relatively good data for this period and the 19th century U.S. shares many characteristics with today's developing countries, for which available data is rather limited. Second, the 19th century U.S. satisfied all four conditions just mentioned: (i) prices of transported goods fell by a factor of four between the West and the East over the period 1850-90; (ii) there was lots of trade across regions (the West exported agricultural goods and imported manufacturing goods, while the East exported manufacturing goods and imported agricultural goods); (iii) the regional production functions were very different because there were large regional differences in endowments (examples are farm land, minerals and timber, water power, and infrastructure); (iv) agricultural and manufacturing goods are not very substitutable.\\ We build a Ricardian model with two regions, the West and the East. There are three final goods: services, agricultural goods, manufacturing goods. Agricultural and manufacturing goods can be transported across the two regions at a cost, whereas services cannot. There are many households who choose in which region to work and consume. This feature differs from standard trade models in which people cannot choose where to live.\\ We calibrate our model to the U.S. during the 2. half of the 19th century. We find that the observed improvements in the transport technology account for large increases in GDP. We also find that they can account for large changes in the allocation of people and production across the two regions, which come close to what actually happened.