Market integration and institutional change

This paper examines the impact of institutional change on market integration. We show that the French Revolution’s ideals of freedom and equality that swept through Germany following French rule around the year 1800 significantly reduced city-to-city price gaps in nineteenth century Germany because the ideas led to institutional upgrading in the German states. The economic impact of institutions reduced price gaps by about 25%. Examining a range of indicators of institutional quality, we find that relatively broad indicators affecting multiple elements of commercial activity are most powerful in explaining institutions’ effect on the integration between economies. The paper shows that institutional change does not only change a given, individual economy but its impact is multiplied because institutional change affects the relationship between multiple economies.