• Chart of the Week
  • August 2, 2021

Telegraphing prices

An old telegraph.

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Agricultural markets can experience wild price swings when a flood or drought wipes out crops and impacts local food production.

But improvements in communication infrastructure have helped tame some of the extreme prices, keeping markets better abreast of conditions in nearby regions and helping traders and producers coordinate to respond to local imbalances in supply and demand. 

In a paper in the American Economic Journal: Applied Economics, authors Pei Gao and Yu-Hsiang Lei look at how the expansion of the telegraph network in nineteenth-century China affected grain price variability. Comparing telegraph-connected regions to non-connected regions, the authors found that being able to exchange information immediately kept rice prices more stable when there was a local shock.

 

 

 

 

Figure 3 from Gao and Lei (2021)

 

Panel A from Figure 3 shows the differences in the maximum prices for high-quality rice between telegraph-connected regions and non-connected regions. The hollow circles are the estimated coefficients and the vertical lines are the 95 percent confidence intervals. In the 12 months before the telegraph arrived, there were virtually no regional differences in the maximum prices. But in regions connected by telegraph, there was a sharp decline in extreme prices after the technology was introduced. 

By providing faster access to information about conditions in other regions, the telegraph connection mitigated extremely high prices after an adverse local weather event. However, the authors also found that the telegraph made local prices more responsive to extreme weather events that occurred in other telegraph-connected regions, even those that didn’t directly affect them locally. Taken together, it seems that the telegraph enabled risk-sharing across connected markets by spreading the impact of a negative event to a wider region.

The findings provide insights into the broader stabilizing effects that faster communication has on interconnected markets.   

“Communication Infrastructure and Stabilizing Food Prices: Evidence from the Telegraph Network in China” appears in the July 2021 issue of the American Economic Journal: Applied Economics.