DP11627 Market Integration as a Mechanism of Growth
This paper focuses on market integration as a mechanism through which institutions
affect growth by examining city growth in 19th century Germany, when some
cities experienced deep institutional reform as a result of French rule. Employing an
instrumental-variables approach, we show evidence for a hierarchy of growth factors in
which institutions affect market integration more than market integration affects institutions.
It was institutional improvements that were crucial to market integration,
rather than just declining transport costs, which increased city growth during this time
period. The institutional reforms, however, were transmitted through the mechanism
of market integration. This created a much larger impact on city growth compared
to the institutional impact independent from the market integration mechanism. The
approach we take can be applied to other causes of economic growth.