The Ties that Bind: Railroad Gauge Standards, Collusion, and Internal Trade in the 19th Century U.S.

Compatibility standards are pervasive in the modern economy, and a target for public and private investments, yet evidence on their economic importance is scarce. I study the conversion of 13,000 miles of railroad track in the U.S. South to standard gauge on May 31 and June 1, 1886 as a large-scale natural experiment in compatibility. Using route-level freight traffic data, I find a large redistribution of traffic from steamships to railroads that declines with distance, but no effect on aggregate shipments or prices, possibly due to carriers’ anticompetitive conduct. Counterfactuals suggest that in a more competitive market, half of the cost savings from compatibility might have been passed through to prices, generating nearly a 10% increase in shipments – though in the absence of collusion, the gauge change itself may come into question. JEL Classification: F15, L15, L92, N71