Infrastructure and Institutions: Lessons from History

Abstract: Many economic studies quantify the effects of infrastructures on income and welfare in the past, with the aim of informing policy makers today. A different group of historical studies examines how infrastructures came about, how they were owned and regulated, and how they performed. While diverse in their message, the fundamental role of institutions is a common theme. This paper explores how democratic institutions affected the railway sector in more than 20 countries between 1870 and 1912. The results suggest that formalization of democracy (de jure institutions) tended to encourage network expansion, increased company participation, lowered construction costs, and increased rates of return. Greater democratic participation (de facto institutions) generally had the opposite effect and led to lower average passenger fares with higher freight rates. More generally the analysis suggests a focus on institutions and its role in the infrastructure sector offers a different perspective and lessons for current development.