Job Market Paper: Regional Competition and Economic Growth: Winners and Losers from Market Integration

Do reductions in trade costs increase the income levels of trading regions? The answer of most theoretical trade models is yes, and these models are used by policy-makers to justify investments in new transportation infrastructure to reduce trade costs. I reexamine this question by investigating the impact of the U.S. railway expansion from 1870 to 1890 on county economic growth. My main insight is that while the construction of a new transportation network can benefit a location by increasing producers' access to markets, it also can hurt a location by giving other locations a competitive edge. I derive and test empirically testable implications of the joint effects of market access and competition on economic outcomes from a multisector trade model, and test these implications. I find that on average more than 50% of the benefit of market access is offset by the negative effects of competition. Overall, I find that the expansion of railways increased agricultural land values by 20% to 40%, thus implying that railways explain 1% to 2% of 1890 GNP. My estimates of the impact of railways on American economic growth are lower than those of Donaldson and Hornbeck (2016) and closer to those of Fogel (1964).