The Big Railroad Push: How Policies Change Coordinated Expectations

This paper presents new evidence on how catalyst policies can overcome coordination and financial frictions, shifting expectations in line with Big Push theory. We examine Prussian interventions during the early expansion of the German railroad network, which guaranteed dividends on selected lines. Using newly collected daily data from financial exchanges across the German Confederation, we employ a Difference-in-Differences approach to estimate the causal effects of these guarantees. Prussian railroad stocks rose sharply relative to bonds and bank stocks, with spillovers to non-Prussian and geographically connected lines. To trace the diffusion of expectations, we estimate a structural vector autoregression whose identifying restrictions exploit staggered information flows across markets in the pre-telegraph era. Taken together, the results show that policy can synchronize expectations and catalyze a transition from a low-activity to a coordinated high-activity equilibrium.