Price Discovery and Long-Distance Market Integration

Market integration is vital for economic development; its determinants have been extensively documented in the literature. However, relatively little attention has been paid to the role of economic organizations. This paper seeks to fill this gap by investigating the role of futures exchanges in Republican China. Using manually collected primary data, we employ a continuous difference-in-differences approach to analyze the impact of the Chinese Cotton Goods Exchange on long-distance market integration. We find that, following the exchange's establishment in 1921, geographically distant cities experienced a stronger increase in market integration with Shanghai than nearby cities. Regarding the underlying mechanism, we show that the price-discovery function of the futures exchange promoted long-distance market integration by centralizing markets and reducing price uncertainty.