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Railroads of the Raj: Estimating the Impact of Transportation Infrastructure Dave Donaldson London School of Economics Transportation Infrastructure Empirical Questions: 1. How large are the economic benefits of transportation


  1. Conditions Required for Prediction 1 ln p o dt − ln p o ot = ln T o Prediction 1: odt • Good differentiated by source • Good consumed widely at regions away from source • Free spatial arbitrage • Homogeneous good (Broda and Weinstein, 2008)

  2. Conditions (Plausibly) Satisfied by Salt ln p o dt − ln p o ot = ln T o Prediction 1: odt • Good differentiated by source • Each type could only be made in one location • “Kohat salt” vs. “Sambhar salt” (and 6 others) • Good consumed widely at regions away from source • Biologically essential • Free spatial arbitrage • Sold to unrestricted trading sector at ‘factory’ gate • Homogeneous good (Broda and Weinstein, 2008)

  3. 8 Salt Sources and 125 Sample Districts Annual data, 1861-1930

  4. Empirical Specification ln p o dt = ln p o ot + ln T o • Theory: odt • Empirical version: =ln T o =ln p o ot � �� odt � ���� ln p o β o β o od + φ o od t + δ ln LCR ( R t ; α ) odt + ε o dt = ot + dt • LCR ( R t , α ) odt : ‘lowest-cost route’

  5. Lowest-cost Route: LCR ( R t ; α ) odt • Two inputs: 1. Model full transport system (rail, road, river, coast) in each year as a network: R t • 7651 nodes • ∼ 3 million links out of potential ∼ 59 million links (7651 × 7651) • Network 2. Per-unit distance trade cost of each mode: α • α . = ( α rail = 1 , α road , α river , α coast ) • Assume: Perfectly competitive trading sector, no fixed costs of trading, no congestion, traders know ( R t , α ), traders choose cheapest route

  6. Lowest-cost Route: LCR ( R t ; α ) odt • Conditional on α , solve for lowest-cost route over R t for each o - d pair (in each year t ): • Computationally feasible, due to Dijkstra’s ‘shortest path’ algorithm • Search over ( δ, α ) to minimize squared residuals of price equation ⇒ ( � δ, � α )

  7. Trade Costs: Baseline Results ln p o dt = β o ot + β o od + φ o od t + δ ln LCR ( R t ; α ) odt + ε o dt Dependent variable: OLS log destination salt price (1) Log distance to source along 0.135 lowest ‐ cost route (ie LCR( R t , α ) ) (0.038)*** Mode ‐ wise relative marginal costs Rail: (ie α rail ) 1 Road: (ie α road ) 4.5 River: (ie α river ) 3 Coast: (ie α coast ) 2.25 Observations 7329 R ‐ squared 0.84 Note: Regressions include salt type x year, and salt type x destination fixed effects, and a salt type x destination trend. OLS standard errors clustered at the destination district level.

  8. Trade Costs: Baseline Results ln p o dt = β o ot + β o od + φ o od t + δ ln LCR ( R t ; α ) odt + ε o dt Dependent variable: OLS NLS log destination salt price (1) (2) Log distance to source along 0.135 0.247 lowest ‐ cost route (ie LCR( R t , α ) ) (0.038)*** (0.063)*** Mode ‐ wise relative marginal costs Rail: (ie α rail ) 1 1 Road: (ie α road ) 4.5 7.88*** River: (ie α river ) 3 3.82*** Coast: (ie α coast ) 2.25 3.94* Observations 7329 7329 R ‐ squared 0.84 0.97 Note: Regressions include salt type x year, and salt type x destination fixed effects, and a salt type x destination trend. OLS standard errors clustered at the destination district level.

  9. Trade Costs: Extensions ln p o dt = β o ot + β o od + φ o od t + ρ RAIL odt + ε o dt Dependent variable: OLS OLS OLS OLS log destination salt price (1) (2) (3) (4) Railroad from source to ‐ 0.112 to destination (0.046)*** Observations Observations 7 329 7,329 R ‐ squared 0.84 Note: Regressions include salt type x year and salt type x destination fixed effects, and a salt type x destination trend. Column 3 also contains bilateral district pair fixed effects. OLS standard errors clustered at the destination district level.

  10. Trade Costs: Extensions ln p o dt = β o ot + β o od + φ o od t + ρ RAIL odt + ε o dt Dependent variable: OLS OLS OLS OLS log destination salt price (1) (2) (3) (4) Railroad from source to ‐ 0.112 ‐ 0.009 to destination (0.046)*** (0.041) camels, elephants, carts and inland boats Observations Observations 7 329 7,329 5 176 5,176 R ‐ squared 0.84 0.73 Note: Regressions include salt type x year and salt type x destination fixed effects, and a salt type x destination trend. Column 3 also contains bilateral district pair fixed effects. OLS standard errors clustered at the destination district level.

  11. Trade Costs: Extensions ln p o dt = β o ot + β o od + φ o od t + ρ RAIL odt + ε o dt Dependent variable: OLS OLS OLS OLS log destination salt price (1) (2) (3) (4) Railroad from source to ‐ 0.112 ‐ 0.009 ‐ 0.046 to destination (0.046)*** (0.041) (0.009)*** If conduct salt regression on ALL bilateral market pair comparisons Observations Observations 7 329 7,329 5 176 5,176 631 451 631,451 R ‐ squared 0.84 0.73 0.76 Note: Regressions include salt type x year and salt type x destination fixed effects, and a salt type x destination trend. Column 3 also contains bilateral district pair fixed effects. OLS standard errors clustered at the destination district level.

  12. Trade Costs: Extensions ln p o dt = β o ot + β o od + φ o od t + ρ RAIL odt + ε o dt Dependent variable: OLS OLS OLS OLS log destination salt price (1) (2) (3) (4) Railroad from source to ‐ 0.112 ‐ 0.009 ‐ 0.046 ‐ 0.024 to destination (0.046)*** (0.041) (0.009)*** (0.019) If conduct same regression on ALL bilateral market pair comparisons for 17 ag. goods Observations Observations 7 329 7,329 5 176 5,176 631 451 631,451 9 184 552 9,184,552 R ‐ squared 0.84 0.73 0.76 0.81 Note: Regressions include salt type x year and salt type x destination fixed effects, and a salt type x destination trend. Column 3 also contains bilateral district pair fixed effects. OLS standard errors clustered at the destination district level.

  13. Trade Costs: Robustness Checks • Insignificant changes when allowing for: • Divergent technological progress and/or input costs (allow α to change over time) • Cost for changing railroad gauge • ‘Out-of-sample’ test for free arbitrage violations: How often is jt > � ln p k it − ln p k δ ln LCR ( R t ; � α ) ijt ? • 2.8 % of (non-source) pairs for salt • 4.8 % of all pairs for 17 agricultural goods Ad valorem; Congestion Placebo

  14. Step Did railroads... Result Estimation ...reduce trade costs Yes Trade costs 1 (and price gaps)? Model ...expand trade? Yes 2 parameters ...reduce price Model Yes: to 0 Yes: to ≈ 0 3 responsiveness? i ? evaluation l i ...raise real income Yes 4 level? ...reduce real income 5 Yes volatility? ...promote (static) Yes: Trade model accounts for 6 88 % of real income gains 88 % of real income gains gains from trade? gains from trade?

  15. Railroads and Trade Flows: Summary I ln X k = ln λ k + ln A k od o − θ k ln r o − θ k ln T k od + θ k ln p k d X k d • Suggests specification (based on earlier proxy for T k od ): ln X k odt = β k ot + β k dt + β k od + φ k od t − θ k � α ) odt + ε k δ ln LCR ( R t ; � odt • Data: 6 million observations on trade flows • Geography: 45 Indian ‘trade blocks’, 23 foreign countries • Goods: salt, 17 agricultural • Modes: Rail, River, Coast (and some Road)

  16. Railroads and Trade Flows: Summary II od t − θ k � ln X k odt = β k ot + β k dt + β k od + φ k α ) odt + ε k δ ln LCR ( R t ; � odt • Step 1: Goal is to estimate θ k • Separate regression on each k • ⇒ average � θ k = 3 . 8

  17. Railroads and Trade Flows: Summary II od t − θ k � ln X k odt = β k ot + β k dt + β k od + φ k α ) odt + ε k δ ln LCR ( R t ; � odt • Step 1: Goal is to estimate θ k • Separate regression on each k • ⇒ average � θ k = 3 . 8 • Step 2: Goal is to estimate A k ot • Assume: A k ot = γ ot + γ k o + γ k t + κ RAIN k ot + ε k ot • ⇒ � ot + � β k θ k ln r ot = γ ot + γ k o + γ k t + κ RAIN k ot + ε k ot • RAIN k ot : crop k -specific rainfall, from daily rainfall (3614 gauges) and Crop Calendar Rain gauges • ⇒ � κ = 0.441 (0.082) More Trade Flows Step 3: Price Responsiveness

  18. Step Did railroads... Result Estimation ...reduce trade costs Yes Trade costs 1 (and price gaps)? Model ...expand trade? Yes 2 parameters ...reduce price Model Yes: to 0 Yes: to ≈ 0 3 responsiveness? i ? evaluation l i ...raise real income Yes 4 level? ...reduce real income 5 Yes volatility? ...promote (static) Yes: Trade model accounts for 6 88 % of real income gains 88 % of real income gains gains from trade? gains from trade?

  19. Railroads and Real Income Levels Yot d ( Pot ) Lot � • Prediction 4: < 0 dT k odt • Suggests linear approximation: ln( Y ot P ot ) = β o + β t + γ RAIL ot + ε ot L ot � • Data on real agricultural income per acre: • Y ot = � k p k ot q k ot , 17 agricultural crops (ignores: savings, taxes/transfers, intermediate inputs, income from other sectors, income inequality) • � P ot = (chain-weighted) Fisher ideal price index, 17 agricultural crops (ignores: other costs of living, gains from new varieties)

  20. Real Income Levels: Reduced-form Results Y ot ln( P ot ) = β o + β t + γ RAIL ot + ε ot L ot � Dependent variable: OLS OLS log real agricultural income (1) (2) Railroad in district 0.165 (0.056)*** Railroad in neighboring district Observations 14,340 R ‐ squared 0.744 Note: Regressions include district and year fixed effects. OLS standard errors clustered at the district level. Alternative RAIL measures Robustness

  21. Real Income Levels: Reduced-form Results � Y ot P ot ) = β o + β t + γ RAIL ot + φ 1 ln( d ∈ N o RAIL dt + ε ot L ot � N o Dependent variable: OLS OLS log real agricultural income (1) (2) Railroad in district 0.165 0.182 (0.056)*** (0.071)*** Railroad in neighboring district ‐ 0.042 (0.020)** Observations 14,340 14,340 R ‐ squared 0.744 0.758 Note: Regressions include district and year fixed effects. OLS standard errors clustered at the district level. Alternative RAIL measures Robustness

  22. Robustness Checks 1. 4 Placebo checks [no spurious ‘impacts’] • Over 40,000 km of planned lines that were not built for 4 different reasons 2. Instrumental variable [similar to OLS] • 1880 Famine Commission: rainfall in 1876-78 predicts railroad construction post-1884 3. Bounds check [tight bounds] • Lines explicitly labeled as ‘commercial’, ‘military’ or ‘redistributive’ display similar effects

  23. Robustness Checks 1. 4 Placebo checks [no spurious ‘impacts’] • Over 40,000 km of planned lines that were not built for 4 different reasons 2. Instrumental variable [similar to OLS] • 1880 Famine Commission: rainfall in 1876-78 predicts railroad construction post-1884 3. Bounds check [tight bounds] • Lines explicitly labeled as ‘commercial’, ‘military’ or ‘redistributive’ display similar effects

  24. ‘Placebo’ I: 4-Stage Planning Hierarchy 14,000 km: Lines reached increasingly costly stages but then abandoned 0.2 oefficient on RAIL 0.15 0.1 Unbuilt Railroad Lines 0.05 co 0 ‐ 0.05

  25. ‘Placebo’ II: 1869 Lawrence Plan 12,000 km: Grand 30-year plan scrapped en masse by successor 0.2 efficient on RAIL 0.15 Unbuilt Railroad Lines 0.1 coe 0.05 0 ‐ 0.05

  26. ‘Placebo’ III: Chambers of Commerce Plan 7,500 km: Bombay and Madras Chambers submit (commercially attractive) plan 0.2 0.15 t on RAIL 0.1 U b il R il Unbuilt Railroad Lines d Li coefficien 0.05 0 ‐ 0.05 built lines Bombay Madras

  27. ‘Placebo’ IV: Major Kennedy 1853 Plan 9,000 km: Chief Engineer’s cheapest way to connect capitals Dependent variable: OLS OLS log real agricultural income (1) (2) Railroad in district 0.182 0.188 (0.071)*** (0.075)** (Kennedy high ‐ priority line) x trend 0.0005 (0.038) (Kennedy low ‐ priority line) x trend ‐ 0.001 (0.026) Observations 14,340 14,340 R ‐ squared 0.758 0.770 Note: Regressions control for neighboring district railroad access and include district and year fixed effects. OLS standard errors clustered at the district level.

  28. Robustness Checks 1. 4 Placebo checks [no spurious ‘impacts’] • Over 40,000 km of planned lines that were not built for 4 different reasons 2. Instrumental variable [similar to OLS] • 1880 Famine Commission: rainfall in 1876-78 predicts railroad construction post-1884 3. Bounds check [tight bounds] • Lines explicitly labeled as ‘commercial’, ‘military’ or ‘redistributive’ display similar effects

  29. Instrumental Variable • 1876-78 famine led to 1880 Famine Commission: • 1880 Commission unique in recommending railroads • Instrumental variable: • Rainfall anomalies in 1876-78 agricultural years predict railroad construction post-1884 • Control for contemporaneous and lagged rain • Falsification: • Does rainfall in other “famine” (Commission) years predict railroads? No. • Does rainfall in other “famine” (Commission) years correlate with real income? No.

  30. Instrumental Variable Results Railroad in Log real ag Dependent variable: district income OLS IV (1) (2) (Rainfall deviation in 1876 ‐ 78) x ‐ 0.044 (post ‐ 1884 indicator) (0.018)*** Rainfall in district 0.013 1.104 (0.089) (0.461)** Rainfall in district (lagged 1 year) ‐ 0.003 0.254 (0.048) (0.168) (Rainfall in "famine" year) x 0.006 0.011 (post ‐ "famine" year indicator) (0.021) (0.031) Railroad in district 0.197 (0.086)** Observations 14,340 14,340 R ‐ squared 0.65 0.74 Note: Regressions include district and year fixed effects, and control for rainfall of 2 lagged and 3 lagged years, and neighboring district railroad access. OLS standard errors clustered at the district level.

  31. Robustness Checks 1. 4 Placebo checks [no spurious ‘impacts’] • Over 40,000 km of planned lines that were not built for 4 different reasons 2. Instrumental variable [similar to OLS] • 1880 Famine Commission: rainfall in 1876-78 predicts railroad construction post-1884 3. Bounds check [tight bounds] • Lines explicitly labeled as ‘commercial’, ‘military’ or ‘redistributive’ display similar effects

  32. Bounds Check P ot ) = β o + β t + � � j γ j PURPOSE j × RAIL ot + φ 1 Y ot ln( d ∈ N o RAIL dt + ε ot L ot � N o From 1883 ‐ 1904 lines had to declare an intended primary purpose ient on RAIL 0.25 0.2 0.15 coeffici 0.1 0.05 0

  33. Real Income: Extensions • Consistent with model’s predictions: • Bilateral (Krugman) specialization index rises • Real income volatility falls Volatility • Railroads and demographic change: • Mortality rate: 3 % drop • Fertility rate: 4 % rise • Migration: no change • Population: 6 % rise • Real agricultural income per capita: 10 % rise • Real rural wage: 8 % rise • ‘Real’ urban wage: no change

  34. Step Did railroads... Result Estimation ...reduce trade costs Yes Trade costs 1 (and price gaps)? Model ...expand trade? Yes 2 parameters ...reduce price Model Yes: to 0 Yes: to ≈ 0 3 responsiveness? i ? evaluation l i ...raise real income Yes 4 level? ...reduce real income 5 Yes volatility? ...promote (static) Yes: Trade model accounts for 6 88 % of real income gains 88 % of real income gains gains from trade? gains from trade?

  35. Real Income Gains: Gains from Trade? • Prediction 6: Autarkiness ( π k oot ) is a sufficient statistic for the impact of railroads on real income: � � µ k µ k ln( Y ot ln A k ln π k P ot ) = Ω + ot − oot L ot � θ k θ k k k • Use this to compare reduced-form real income estimates (Step 4) to model predictions: � � µ k µ k θ k ln π ( � ln( Y ot � κ RAIN k � Θ , Z t ) k P ot ) = + ρ 1 ot + ρ 2 θ k � L ot � � � oot k k � + α o + β t + γ RAIL ot + φ 1 RAIL dt + ε ot N o d ∈ N o

  36. Real Income: Gains from Trade? � � � Y ot 1 µ k ln( P ot ) = γ RAIL ot + d ∈ N o RAIL dt + ρ 1 κ RAIN k θ k � L ot � k � ot N o Dep. var: log real agricultural income OLS OLS Railroad in district 0.182 (0.071)*** Railroad in neighboring district ‐ 0.042 (0.020)** Rainfall in district "Autarkiness" measure (computed in model) Observations 14,340 R ‐ squared 0.744 Note: Regressions include district and year fixed effects. OLS standard errors clustered at the district level.

  37. Real Income: Gains from Trade? � � � � � Y ot 1 µ k µ k ln( P ot ) = γ RAIL ot + d ∈ N o RAIL dt + ρ 1 κ RAIN k ot + ρ 2 θ k ln � π k θ k � L ot � k � k � oot N o Dep. var: log real agricultural income OLS OLS Railroad in district 0.182 0.021 (0.071)*** (0.096) Railroad in neighboring district ‐ 0.042 0.003 (0.020)** (0.041) Rainfall in district 1.044 (0.476)** "Autarkiness" measure (computed in model) ‐ 0.942 (0.152)*** Observations 14,340 14,340 R ‐ squared 0.744 0.788 Note: Regressions include district and year fixed effects. OLS standard errors clustered at the district level.

  38. Conclusion 1. Railroads improved the trading environment in India • Trade costs (and price gaps) fell • Trade flows rose • Price responsiveness fell 2. Railroads raised real incomes in India • Real income volatility fell too 3. Welfare gains from railroads are well accounted for by a Ricardian model of trade • Suggests that static gains from trade were important economic mechanism behind the benefits of railroads

  39. Equilibrium Prices • Consumers in d face many potential suppliers of each variety • They consume the cheapest: p k d ( j ) = min o { p k od ( j ) } � � D � p k d ( j ) ∼ G k A k o ( r o T k od ) − θ k ] p θ k d ( p ) = 1 − exp − [ o =1 • Average price within good k : � D � − 1 /θ k � d ( j )] . E [ p k = p k d = λ k A k o ( r o T k od ) − θ k 1 o =1 Return

  40. From Theory to Empirics • Adding time: • Exogenous variables ( A k ot , T k odt ) vary over time • Stochastic productivities ( z k ot ( j )) re-drawn (iid) every period • Parameters ( θ k , ε k ) fixed over time Return

  41. Prediction 3: Price Responsiveness �� D � − 1 /θ k • Recall: p k d = λ k o =1 A k o ( r o T k od ) − θ k 1 • Prediction 3: Price responsiveness ( dp dA ) and trade costs ( T ) around symmetric equilibrium: � dp k � � dp k � d d d d < 0 > 0 dT k dA k dT k dA k o do d do � �� � � �� � less own responsiveness more ‘connected’ responsiveness Return

  42. Prediction 4: Real Income Levels • Welfare (of representative agent owning unit of land) is equal to real income: V ( p o , r o ) = r o Y o = � L o � P o P o • Prediction 4: Real income ( Y P ) and trade costs L � ( T ) around a symmetric equilibrium: d ( r o d ( r o P o ) P o ) � � < 0 > 0 j � = o dT k dT k od jd � �� � � �� � own railroads good others’ railroads bad Return

  43. Prediction 5: Real Income Volatility • Prediction 5: Real income responsiveness d ( r P ) � ( dA ) and trade costs ( T ) around a symmetric equilibrium: � d ( r o � P o ) d � > 0 dT k dA k o od • If productivity ( A k o ) is stochastic, then less responsiveness means less volatility Return

  44. Transport system as a Network Input: The transportation system (in 1930) Return

  45. Transport system as a Network Output: Network representation of transportation system (in 1930) Return

  46. Trade Costs: Robustness Checks Ad valorem specification, demand effects, congestion Dependent variable: NLS NLS NLS log destination salt price (1) (2) (3) Log effective distance to source 0.247 0.204 0.259 along LCR (0.063)*** (0.076)*** (0.071)*** (Log eff. dist. to source along LCR) x 0.0184 (Excise tax at source) (0.040) Rainfall at destination 0.013 (0.042) Rainfall along source ‐ destination route ‐ 0.003 (0.081) Observations 7329 7329 7329 R ‐ squared 0.97 0.98 0.98 Note: Regressions include salt type x year and salt type x destination fixed effects, and a salt type x destination trend. OLS standard errors clustered at the destination district level. Return

  47. Trade Costs: Major Kennedy’s Placebo Kennedy’s 23,000 km prposal. (Recall: α rail = 1, for built lines) Major Kennedy's Rejected Proposal 9 8 7 6 alpha 5 4 3 2 2 1 0 coast river road "high priority" "low priority" Built Network Unbuilt Network Return

  48. Trade Flows: Reduced-form specification od ) − θ k ( p k d ) θ k X k • Prediction 2: X k od = λ k 3 A k o ( r o T k d • Suggests empirical specification: ln X k odt = β k ot + β k dt + β k od + φ k od t + ρ 1 LCR odt + ρ 2 G k LCR odt + ε k odt • G k = good-specific characteristics: weight per-unit value (1880), freight class (1880) Return

  49. Trade Flows: Reduced-form results ln X k odt = β k ot + β k dt + β k od + φ k od t + ρ 1 LCR odt + ρ 2 G k LCR odt + ε k odt Dependent variable: OLS OLS OLS log value of exports (1) (2) (3) Fraction of origin ‐ destination districts 1.482 connected by railroad (0.395)*** Log effective distance to source ‐ 1.303 ‐ 1.284 along lowest ‐ cost route (0.210)*** (0.441)*** (Log eff. distance to source along LCR) x ‐ 0.054 (Weight per unit value of good) (0.048) (Log eff. distance to source along LCR) x 0.031 (Different freight class from salt) (0.056) Observations 6,581,327 6,581,327 6,581,327 R ‐ squared 0.943 0.963 0.964 Note: Regressions include origin trade block x year x commodity, destination trade block x year x commodity, and origin trade block x destination trade block x commodity fixed effects and an origin trade block x destination trade block x commodity trend. OLS standard errors clustered at the exporting trade block level. Return

  50. Trade: Estimating parameters—Step 1 • Estimate (once for each good k ): ln X k odt = β k ot + β k dt + β k od + φ k od t − θ k � α ) odt + ε k δ ln LCR ( R t ; � odt Mean ( � Std. dev. ( � Sample θ k ) θ k ) all 85 goods 5.2 2.1 17 ag. goods 3.8 1.2 Eaton-Kortum 8.3 { 3 . 60 , 12 . 86 } OECD manuf. Return

  51. Trade: Estimating parameters—Step 2 • Estimate determinants of (agricultural) productivity: • Fixed effect � β k ot from previous regression interpreted as: � ot + � β k θ k ln r ot = ln A k ot � ot + � β k θ k ln r ot = γ k o + γ k t + γ ot + κ RAIN k ot + ε k ⇒ ot • Data: • r ot = per acre agricultural output value (17 crops) • Crop-specific rainfall from dates in Crop Calendar • Daily rainfall (3614 rain gauges) Rain gauges • Result: • � κ = 0.441 (0.082) Return

  52. Daily Rainfall Data 3614 meteorological stations with rain gauges Return Trade Return Prices

  53. Trade Flows: Bounds Check od t + � j ρ j TC odt × PURPOSE j + ε k ln X k odt = α k ot + β k dt + γ k od + φ k odt From 1883-1904 lines had to declare an ent on RAIL dummy intended primary purpose 0.5 0.45 0.4 0.35 0.3 0.25 coefficient o 0.2 0.15 0.15 0.1 0.05 0 undeclared "protective "protective" productive" "military" "productive" (not 1883- 1904) and Return

  54. Step Did railroads... Result Estimation ...reduce trade costs Yes Trade costs 1 (and price gaps)? Model ...expand trade? Yes 2 parameters ...reduce price Model Yes: to 0 Yes: to ≈ 0 3 responsiveness? i ? evaluation l i ...raise real income Yes 4 level? ...reduce real income 5 Yes volatility? ...promote (static) Yes: Trade model accounts for 6 88 % of real income gains 88 % of real income gains gains from trade? gains from trade?

  55. Prices and Local Rainfall � � � � dp k d • Prediction 3: � > 0 � dt dT k dA k dot dt • Suggests linear approximation: ln p k dt = β k d + β k t + β dt + χ 1 RAIN k dt + χ 2 RAIN k dt × RAIL dt + ε k dt • Data: • p k dt = 239 districts, 17 crops, annually 1861-1930 • RAIN K dt = amount of rain over district-crop growing period • Crop Calendar and daily rain from 3614 gauges Rain gauges Return

  56. Price Responsiveness Results ln p k dt = β k d + β k t + β dt + χ 1 RAIN k dt + χ 2 RAIN k dt × RAIL dt + ε k dt Dependent variable: log price OLS OLS OLS OLS (1) (2) (3) (4) Local rainfall ‐ 0.256 (0.102)** (Local rainfall) x (Railroad in district) Neighboring district rainfall (Neighboring district rainfall) x (Connected to neighbor by rail) Observations 73,000 R ‐ squared 0.89 Note: Regressions include crop x year, district x year and district x crop fixed effects. OLS standard errors clustered at the district level. Return Model Evaluation Placebo 1 Placebo 2 Bounds

  57. Price Responsiveness Results ln p k dt = β k d + β k t + β dt + χ 1 RAIN k dt + χ 2 RAIN k dt × RAIL dt + ε k dt Dependent variable: log price OLS OLS OLS OLS (1) (2) (3) (4) Local rainfall ‐ 0.256 ‐ 0.428 (0.102)** (0.184)*** (Local rainfall) x (Railroad in district) 0.414 (0 195)** (0.195)** Neighboring district rainfall (Neighboring district rainfall) x (Connected to neighbor by rail) Observations 73,000 73,000 R ‐ squared 0.89 0.89 Note: Regressions include crop x year, district x year and district x crop fixed effects. OLS standard errors clustered at the district level. Return Model Evaluation Placebo 1 Placebo 2 Bounds

  58. Price Responsiveness Results ln p k dt = β k d + β k t + β dt + χ 1 RAIN k dt + χ 2 RAIN k dt × RAIL dt + ε k dt Dependent variable: log price OLS OLS OLS OLS (1) (2) (3) (4) Local rainfall ‐ 0.256 ‐ 0.428 ‐ 0.402 (0.102)** (0.184)*** (0.125)*** (Local rainfall) x (Railroad in district) 0.414 0.375 (0.195)** (0 195)** (0 184)* (0.184)* Neighboring district rainfall ‐ 0.021 (0.018) (Neighboring district rainfall) x ‐ 0.082 (Connected to neighbor by rail) (0.036)** Observations 73,000 73,000 73,000 R ‐ squared 0.89 0.89 0.90 Note: Regressions include crop x year, district x year and district x crop fixed effects. OLS standard errors clustered at the district level. Return Model Evaluation Placebo 1 Placebo 2 Bounds

  59. Price Responsiveness Results ln p k dt = β k d + β k t + β dt + χ 1 RAIN k dt + χ 2 RAIN k dt × RAIL dt + ε k dt Dependent variable: log price OLS OLS OLS OLS (1) (2) (3) (4) Local rainfall ‐ 0.256 ‐ 0.428 ‐ 0.402 0.004 (0.102)** (0.184)*** (0.125)*** (0.035) (Local rainfall) x (Railroad in district) 0.414 0.375 0.024 (0 195)** (0.195)** (0.184)* (0 184)* (0 120) (0.120) Neighboring district rainfall ‐ 0.021 (0.018) (Neighboring district rainfall) x ‐ 0.082 Salt (Connected to neighbor by rail) (0.036)** Observations 73,000 73,000 73,000 8,489 R ‐ squared 0.89 0.89 0.90 0.53 Note: Regressions include crop x year, district x year and district x crop fixed effects. OLS standard errors clustered at the district level. Return Model Evaluation Placebo 1 Placebo 2 Bounds

  60. Model Validation Using Price Data I �� D � − 1 θ k od ) − θ k • Recall, prices: p k d = λ k o =1 A k o ( r o T k 1 • Have estimates of RHS: ot and � • A k κ RAIN k ot = � θ k from trade flows odt = � • ln T k δ ln LCR ( N t ; � α ) odt from salt prices • r ot : could use data on this, but compute model prediction instead ⇒ � r ot • λ k 1 Contains σ k , but don’t need it • Include predicted prices in regression to evaluate out-of-equation performance � D � − 1 � � θ k odt ) − � � r ot � θ k p k dt = λ k A k T k � ot ( � 1 o =1 Return

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