Domestic transport costs, Canada, and the Panama Canal

By reducing transport costs infrastructure can impact wages, the distribution of population and welfare among other important variables. In this paper I exploit a natural experiment provided by the opening of the Panama Canal and intercoastal cargo routes connecting the west and east coasts of Canada through the canal to examine the causal impact of a reduction of domestic trade costs. The particular characteristics of this setting allow me to estimate the causal impact without recurring to instrumental variable strategies. The estimates are also not confounded with the Keynesian effect of building new infrastructure since no infrastructure was actually setup in Canada. Using least cost path routes along the Canadian transport grid I determine treated municipalities. The paper documents the positive impact of the reduction of transport costs on population and the value of real property but a negative impact on nominal wages. I then use a simplified version of an economic geography model with perfect mobility of workers to compute domestic trade shares between Canadian municipalities and productivities at the municipal level. I use these empirical results and the model, to quantify general equilibrium changes in wages, population and trade shares triggered by the reduction in domestic transport costs. Finally, I show that the opening of intercoastal shipping routes had a large positive welfare effect across Canadian municipalities.