Abstract Market mechanism is the basic foundation of modern society. Market integration is an important manifestation of market growth. How is market formed or changed over time? Previous studies have explored the impacts of spatial distance and transportation on market integration. This paper argues that natural disasters have also played a key role in the evolution of market integration, especially on grain markets. As extreme climate events, disasters have an impact on grain production, which would lead to development and evolution of the grain markets. There is great theoretical significance for us to learn about market evolution patterns by studying the impact of disasters on market integration. This paper demonstrates that disasters influence grain markets integration through two mechanisms. Firstly, market grains supply decreases in the short run when disasters occur, which causes arbitrage opportunities between markets of different regions. Disasters reduce the local grain production significantly in a short period of time. As grain production is seasonal, it is impossible to get over the influences of disasters through production adjustments. Decreasing supply will suddenly raises grain prices in the markets and promotes grain transportation between regions. Secondly, disaster relief provided by the central government would decrease transaction costs and promote market integration. Take Qing Dynasty for instance, Qing Shilu records many government disaster reliefe and some of them, such as reducing transaction tax, lifting export ban, guiding grain transaction, increasing water conservancy projects and dredging watercourses, deceased transaction costs and promoted the interconnectivity between local and neighboring grain markets. By digging the history, this paper first explains the mechanisms theoretically. Then, using China's major grain monthly price dataset from 216 prefectures in 18 provinces during 1746-1795 from Gongzhong Liangjia Qingdan (Grain price lists in the palace achieves) and the Chinese historical disaster records dataset during 1696-1795, this paper analyzes the impact of natural disasters on grain market integration empirically. The empirical results show that natural disasters have a significant positive effect on the integration of grain markets. In Qing Dynasty,water transport was the most common way for commodity exchanges especially for bulk commodities such as grain and cotton. The growing environment and storage condition of rice and wheat are different, which may cause various behaviors in the markets and lead to distinct market integration from each other when market participants face disasters. The findings still hold after controlling the traffic conditions and grain varieties. Besides, the impact of disasters on market integration may lag behind and market integrations may differ from the north to the south. We conduct regressions in dynamic perspectives and in two main regions. After considering the time variance and dividing the whole dataset into the north region and the south region, the results remain robust. This paper not only explains the mechanisms of the positive impacts of disasters on market integration in the historical perspective, but also empirically testifies the impact with historical data.
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