456/2020 Marta Santamaria

Can governments adjust transportation infrastructure to unexpected economic changes? This paper studies the importance of flexibility in the development of a transport network exploiting the division of Germany. To understand the incentives behind infrastructure construction, I develop a multi-region quantitative trade model with endogenous infrastructure choice and calibrate it to the pre-war German economy. I exploit the division of Germany, an exogenous change in borders, to test the ability of the model to predict highway development before and after the division. Using newly collected data, I document that the West German government considerably reshaped the highway network after the division shock. The reshaping of the network increased aggregate welfare by 1.24% to 2.13%. However, this reshaping was constrained by the part of the network developed before the division. I quantify the cost of path-dependence from these pre-division highway links. The ability to reshape the full network could have increased aggregate welfare by an additional 1.86%.

Economic History