Portage and Path Dependence Hoyt Bleakley and Jeffrey Lin. 2012. Theresa Geyer, Economics B.Sc., Universität Heidelberg

Portage Sites During early settlement in North America, rivers were main transportation routes Portage Sites: Places where boats/ cargo could be carried over land to avoid an obstacle on the waterway Initial value: Completing trade routes  Focal points of commerce in 1800s Became obsolete due to changes in technology

Paper examines why there is still a concentration of economic activity at portage sites in the US although the original natural advantages are nowadays obsolete How is that question answered? The authors answer the question by comparing the predictions of economic models featuring different effects. Main result: The authors favor a model with strong increasing returns to scale in economic activity combined with historically sunk investments to explain the current distribution of economic activity. Summary

Distribution of economic activity Paper‘s contribution Path dependence Natural endowments Distribution of economic activity Paper tells us by which mechanism obsolete natural endowments are able to explain a current distribution of economic activity Disentangling effects of path dependence & natural endowments Portage Sites

The Fall Line & Areas of Analysis Fall Line: Geomorphical feature dividing Piedmont and coastal plain  many falls along this line Portage Site Intersection fall line / river Great Lakes & Mississippi River System Falls on 3 Mississippi tributaries

Further Steps and Background Information Prove decline of portage Background information Quantitative evidence Data proving that early portage sites are still densely populated Maps Statistical comparisons Responses after obsolescence Explanation Historical Factors Contrast to neoclassical prediction Economic models of geography

1.1 Short History and Background Information early 1800s Portaging activities relatively important 1880s employment at portage sites reaches a peak average fall-line county contained 13.1% of total water-transportation employment along an entire river 1930 average fall-line county contained 2.6% of total water-transportation employment along an entire river Transportation Infrastructure Change: canals and locks railroads

1.2. Quantitative Evidence: Employment Data  Portaging activities have started to decline drastically after 1880

2. Data Contemporary distribution of economic activity across the southeastern United States (nighttime lights) FALL LINE Contemporary fall-line cities

In General: Population centers at the points where rivers cross the fall line. No population centers along the fall line, if a river is not present.

2.2 Statistical Comparisons at Fall Line Explanatory variables: - Proximity to portage site - Size of watershed area upstream of the fall line Outcome variable: - Current population density regression Indicators: - census tracts/ counties - average intensity of nighttime lights

Results: a) Proximity to portage site as explanatory variable: 10% farther away from a portage site  6% lower population density in the tract data and 2% lower density in the lights and county data. b) Including the size of watershed upstream: 10% larger upstream watershed  4% higher density at the portage site c) Controlling for other effects  no significant changes  correlation between historical portage and the current distribution of economic activity Watershed size affects current density at portage sites

4. Responses after Obsolescence  Both methods show: no evidence that portage cities became less concentrated as original portaging activities became obsolete Difference-in-difference approach for formal test: First difference: portage advantage Second difference: 19th/20th century

5. Explanations for Persistence Decreasing returns to scale An increase in all inputs (labour/capital) leads to a less than proportional increase in output Congestion Costs Costs resulting because of negative externalities of high population density Sunk Costs

5.1 Historical Factors? Does historical density of specific factors/ combination of these at portage sites explain persistence? Possible factors: railroad network, literacy, … Result: Few differences between portage & nonportage sites if we condition on present-day population density

5.1. Contrast to Neoclassical Prediction Contrasts with predictions of models featuring locally decreasing returns to scale area with actual natural advantages relocation of production factors to this area Portage Sites should have been in decline

5.2 Applying a model of economic geography... … and considering sunk costs No effect on long-run equilibrium Vertical distance shrinks Due to decline in portage advantage& sunk capital depriciation (slows down convergence) In the medium run: differences In the long run: convergence One long-run equilibrium: Intersection of V* and V(x) Natural advantages will not affect long-run equilibrium Alternate locations will have same V curve Differences in density can‘t be persistent utility Value of portage density

...with strong economies of scale Increasing returns > congestion costs … and considering sunk costs Sunk investments could solve coordination problem Vertical distance shrinks Possibility for multiple equilibria at a site Differences in density could persist for a long time More possible long-run equilibria Natural advantages could affect long-run equilibrium Coordination device

Implications Level of current population density Natural endowment CASE A Medium-run equilibrium oversupply of sunk capital in portage sites differences in prices for sunk capital Implications Natural endowment Level of current population density Historical sunk investments CASE B long-run equilibrium

Results (I) Although the advantages of the institution “portage site” became obsolete long time ago, the initial advantages still affect the current population density path dependence can emerge if (i) historical advantages coordinate activity to a particular location (ii) returns to scale rise enough to sustain density there

Results (II): Main Economic Mechanism Natural endowment Water obstacle  portage site Economic model with strong increasing returns to scale Historical portages as coordination device Level of current population density one of the possible equilibria of density obsolescence Central hypothesis: Population density persists in places with obsolete natural advantages if there are strong economies of scale combined with historically sunk investments which act as a coordination device.