Working Paper: CEPR ID: DP6327
Authors: Max Stephan Schulze; Nikolaus Wolf
Abstract: This paper examines the emergence and dynamics of border effects over time. We exploit the unique historical setting of the multinational Habsburg Empire prior to the Great War to explore the hypothesis that border effects emerged as a result of persistent trade effects of ethno-linguistic networks within an overall integrating economy. While markets tended to integrate, the process was strongly asymmetric and shaped by a simultaneous rise in national consciousness and organisation among Austria-Hungary?s different ?nationalities?. We find that the political borders which separated the empire?s successor states after the First World War became visible in the price dynamics of grain markets already 25-30 years before the First World War. This effect of a ?border before a border? cannot be explained by factors such as physical geography, changes in infrastructure or patterns of asymmetric integration with neighbouring regions outside of the Habsburg customs and monetary union. However, controlling for the changing ethno-linguistic composition of the population across the regional capital cities of the empire does explain most of the estimated border effects.
Keywords: border effects; Habsburg Empire; market integration; networks; pre-1914 Europe
JEL Codes: F15; N13; Z13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| ethnolinguistic networks (Z13) | trade (F19) |
| distance-related trade costs + network-related trade costs + city-specific trade costs (F12) | trade costs (F19) |
| ethnolinguistic composition (J15) | border effects (F55) |
| ethnolinguistic similarity between cities (R23) | price dispersion (L11) |
| borders (F55) | price dynamics (E30) |
| network effects (D85) | economic borders (F55) |
| integration of grain markets (Q02) | visibility of borders (F55) |