Yiran Li and Yaohui Peng
This paper investigates the effects of Grand Canal abandonmentin 1825, the world’s largest and oldest manmade waterway, on market integration. Using the archive monthly grain prices to construct an original panel covering 88 prefectures from 1780 to 1911, we find that the canal’s closure led to 27.5% decline in the extent of market integration and its adverse impact lasted for long period. Our results are robust while considering alternative market integration measures, control groups, and international trade influence. For mechanism, we find that the increasing transport cost, rather than information friction, is the main channel to explain the increased market segmentation after canal’s closure. Our findings shed light on the important role of transport infrastructure in reducing arbitrage cost with unique historical evidence.
Chen Shuo