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In The Wind of Change: Maritime Technology, Trade and Economic Development (2015), Pascali estimates various effects on freight rates (i.e. the cost of transport) on outcomes such as trade volumes and economic development. To do this, he exploits a kind of natural experiment that results from the fact that different shipping routes benefit in different ways due to the preexisting wind patterns (i.e. those with wind flows against the route direction).

I guess this controls for demand for shipping, so that freight rates are exogenously affected by transport times. But I don't understand why this is needed to estimate the effects of shipping technology. Isn't the invention of the steamship itself an experiment that allows you to see the effects of shipping technology on trade volume? Why is this additional variation due to asymmetric benefits needed?


A typical regression equation used by him is the following:

enter image description here

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The issue is that the invention of the steamship is not exogenous to economic development. Assuming that trade exerts positive effects on development, it could be that past trade favored economic development and as result the invention of the steamship. By contrast, wind flows are exogenous.

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  • $\begingroup$ "...wind flows are exogenous." Or so we thought before global warming... $\endgroup$ – Giskard May 26 '18 at 22:16
  • $\begingroup$ Right ;-)! Pascali is safe because he is studying the pre-global warming era! $\endgroup$ – emeryville May 26 '18 at 22:25

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