Roads to Development?

We return to two questions concerning the 19th century U.S. transportation revolution. First, to what extent were transportation improvements responsible for the large changes in the regional distribution of population in the United States and, within regions, for the changes in industry structure? Second, how important were transportation improvements for welfare gains? We find that transport improvements were the key factor driving where people lived and what industry they worked in. We also find that transport improvements were important for welfare gains: Gains over 1840-1860 would have been only half as large if there had been no transportation improvements.

From a new International Economic Review article by Berthold Herrendorf, James A. Schmitz, Jr., and Arilton Teixeira.

The emphasis is mine and, quite frankly, I’m surprised that the effect of transportation improvements on welfare is not larger. Better transportation decreases transaction costs, which means that for many goods and services, buyers pay a lower effective price (i.e., market price plus transaction costs) and sellers receive a higher effective price (i.e., market price minus transaction costs).

Decreased transaction costs also stimulate market activity because more would-be buyers and would-be sellers participate on the market rather than opt not to participate, which expands their choice sets, which in turn cannot decrease welfare. This is what development economists mean when we talk “market access.”

Chris Barrett and I empirically explored the effects of fixed and variable transaction costs on the market participation decisions of buyers and sellers of livestock in the region straddling the Kenya–Ethiopia border in our 2006 American Journal of Agricultural Economics article. Among other things, we found that high transaction costs impede market participation.