Property Rights and Path Dependence: 19th Century Land Policy and Modern Economic Outcomes

Abstract: This paper combines recently digitized individual land patent data with remotely sensed satellite data to test whether long-run economic outcomes dier on lands originally settled under the Homestead Act of 1862 compared to land sold for cash. We nd evidence of significantly lower economic activity on homesteaded parcels that is reflected in county-level differences in income per across counties with varying degrees of homesteading. The results challenge two fundamental ideas in economics: that sunk costs are immaterial and that the initial distribution of property rights does not affect efficiency if transaction costs are sufficiently low. Whereas previous work has emphasized the relatively low transaction costs of land transactions within the Public Land Survey System, homesteading has had a lasting effect on both parcel sizes and incomes.