The London School of Economics and Political Science Essays on Development Economics and Japanese Economic History Junichi Yamasaki A thesis submitted to the Department of Economics of the London School of Economics for the degree of Doctor of Philosophy, London, July 2017 Declaration I certify that the thesis I have presented for examination for the MPhil/PhD degree of the London School of Economics and Political Science is solely my own work other than where I have clearly indicated that it is the work of others (in which case, the extent of any work carried out jointly by me and the other person is clearly identified). The copyright of this thesis rests with the author. Quoting from the thesis is permitted, provided full acknowledgment is made. This thesis may not be reproduced without my prior written consent. I warrant that this authorization does not, to the best of my belief, infringe the rights of any third party. I declare that my thesis consists of about 37161 words. Statement of inclusion of previous work I confirm that none of my previous work is included in this thesis. Statement of use of third party for editorial help My thesis was copy edited for conventions of language, spelling, and grammar by ED- ITAGE. 1 Acknowledgment I am sincerely grateful to my advisors, Prof. Robin Burgess and Dr. Greg Fischer, for their continuous support of my PhD study. They guided my development to start my ca- reer as a researcher; without their guidance and continuous feedback, this PhD would not have been achievable. I am also grateful to the following researchers for their comments on my papers: David Atkin, Oriana Bandiera, Gharad Bryan, Maitreesh Ghatak, Vernon Henderson, Janet Hunter, Yukinobu Kitamura, Masayuki Kudamatsu, Takashi Kurosaki, Gerard Padro´ i Miquel, Tetsuya Okazaki, Gianmarco Ottaviano, Hitoshi Shigeoka, Ya- suko Takatsuki, Kensuke Teshima, Shintaro Yamaguchi, and Kazuki Yokoyama. I also would like to pay respect to Hidehiko Ichimura and Yasuyuku Sawada, who supported me even after my graduation at the University of Tokyo. Furthermore, I am surrounded by great friends. My colleagues and friends at the LSE, including Pedro Alves, Michel Azulai, Diego Battiston, Florian Blum, Shiyu Bo, Hao Dong, Miguel Espinosa, Hanwei Huang, Dana Kassem, Yu-Hsiang Lei, Nicola Limodio, Yatang Lin, Stephan Maurer, Tsogsag Nyamdavaa, Frank Pisch, Federico Rossi, Francesco Sannino, Arthur Seibold, Xuezhu Shi, Munir Squires, Eddy Tam, Lisa Wind- steiger, and Giulia Zane gave many comments on my research and supported me during my PhD study in London through conversations over a cup of coffee or pint of beer. Takeshi Aida, Jun Goto, Nobuyoshi Kikuchi, Yuhei Miyauchi, and Mari Tanaka were colleagues when I was at the University of Tokyo and supported me from other insti- tutions to which they subsequently moved. Kohei Kawaguchi shared his post-graduate experience at both the University of Tokyo and LSE with me, and we had many dis- cussions about our research projects. Takahiro Yamamoto provided the impetus to start researching Japanese economic history. Takubo Junpei, Tomohito Honda, Shouta Tojima, and Yoshimasa Katayama provided excellent research assistance. My old friends, Kenichi Koizumi and Michihiro Nakamura, helped me with their programming skills for my data collection. The Nakajima Foundation financially supported my PhD study. The Institution of Economic Research at Hitotsubashi University provided me with invaluable funding and access to archives, which was necessary for my data collection. In addition, for giving 2 me permission to use the data, I greatly appreciate Yutaka Arimoto, Kaori Ito, Asuka Imaizumi, Tetsuji Okazaki, Kentaro Nakajima, and Tomohiro Machikita, who digitized a part of the data used in this thesis with support from the JSPS KAKENHI Grant-in-Aid for Scientific Research (B) 21330064. I owe thanks to John Curtis, Jane Dickson, Rhoda Frith, Gisela Lafico, Akemi Okayasu, Mark Wilbor, and many librarians for their help throughout the process. This work has benefited from comments in various seminars and conferences, includ- ing STICERD, 15th EUDN PhD Workshop on Development Economics, NEUDC 2016, SAEe 2016, Kyoto Summer Workshop on Applied Economics, Hayami Conference, and those at the LSE, Kobe University, Osaka University, The University of Queensland, Tsukuba University, Kindai University, and Hitotsubashi University. Finally, I express appreciation to my parents and in particular my partner, Saeko, for her patience and encouragement during the last 6 years. 3 Abstract This thesis consists of three independent chapters on development economics and Japanese economic history. The first chapter analyzes the effect of railroad construction in the Meiji period (1868– 1912) on technology adoption and modern economic development. By digitizing a novel data set that measures the use of steam engines at the factory level and determining the cost-minimizing path between destinations as an identification strategy, I find that railroad access led to the increased adoption of steam power by factories, which in turn induced structural change and urbanization. My results support the view that railroad network construction was key to modern economic growth in pre-First World War Japan. The second chapter analyzes the effect of time horizon on local public investment in the Edo period (1615–1868). I use a unique event in Japanese history during this period to identify the effect. In 1651, the sudden death of the executive leader of the Tokyo government reduced the transfer risk of local lords, especially for insiders, who supported the Tokyo government during the war of 1600. Using a newly digitized data set and a difference-in-differences strategy, I find that after 1651, regions owned by insiders increased the number of public projects more than regions owned by the other lords. I discuss other possible channels to interpret the effect of tenure risk, but I find no strong support for these alternative channels and conclude that the results support a longer time- horizon effect. The third chapter provides more general background and a complete description of the data availability in Japan in the 17th–20th centuries, to discuss future research directions. It would aid reexamination of the history of Japan and other East Asian countries, which have experienced different economic and political paths. 4 Contents 1 Railroads, Technology Adoption, and Modern Economic Development: Ev- idence from Japan 14 1.1 Introduction ................................. 15 1.2 Conceptual Framework ........................... 25 1.3 Background and Data ............................ 28 1.3.1 Development of the Japanese Rail Network . 28 1.3.2 Steam Power and the Japanese Economy . 35 1.3.3 Descriptive Statistics ........................ 41 1.4 Main Results ................................ 41 1.4.1 Preliminaries: Factory-level Analysis . 44 1.4.2 Main Result: Effect of Railroad on Technology Adoption in 1888– 1902 ................................. 46 1.4.3 Robustness Checks ......................... 48 1.5 The Effect on Modern Economic Development . 61 1.5.1 Structural Change .......................... 62 1.5.2 Urbanization ............................ 63 1.6 Conclusion ................................. 64 Appendices 67 1.A Appendix .................................. 67 1.A.1 A Formal Model .......................... 67 1.A.2 Data Description .......................... 73 1.A.3 Excluded Counties ......................... 75 1.A.4 Descriptive Statistics of Factory-Level Data in 1902 . 76 1.A.5 Regression Analysis on the First Stage . 76 1.A.6 Other Factory-related Outcomes and Prefecture-level Control and Clustering .............................. 78 1.A.7 Additional Specification for the Cost Function . 78 1.A.8 Omitting Subsample ........................ 84 5 1.A.9 Long-term Effects .......................... 89 1.A.10 Comparison with Tang (2014) ................... 90 2 Time Horizon of Government and Public Goods Investment: Evidence from Japan 103 2.1 Introduction .................................104 2.2 Conceptual Framework . 107 2.3 Background and Data ............................108 2.3.1 Background: Political Identity, Government Structure, and Trans- fer Policy ..............................109 2.3.2 Background: Agricultural Investment . 112 2.3.3 Data Sources ............................113 2.3.4 Descriptive Statistics . 116 2.4 Results ....................................121 2.4.1 Main Results ............................121 2.4.2 Robustness Checks: Placebo and Other Changes Between Regimes 125 2.4.3 Robustness Checks: Data Quality . 130 2.4.4 Time Horizon and Other Explanations . 132 2.5 Conclusions .................................132 Appendices 134 2.A Appendix ..................................134 3 Measuring Economic and Political Development in Pre-modern and Early Modern Japan 144 3.1 Introduction .................................145 3.2 Background .................................147 3.3 Data: Edo Period (1615–1868) . 151 3.3.1 Data List ..............................151 3.3.2 Descriptive Statistics . 153 3.4 Data: After the Meiji Period (1868–1912) . 158 3.4.1 Data List ..............................158 3.4.2 Descriptive Statistics . 163 3.5 Conclusion .................................170 6 List of Figures 1.1 Railroad Network .............................. 16 1.2 Adoption of New Technology in the Industrial and Agricultural Sectors . 17 1.3 Relative Price (Industrial/Agriculture) .................... 18 1.4 Decline in the Primary Sector, 1885–1920