Abstract

"Railroad Tunneling: Self Dealing during the Construction of the First Transcontinental Railroad"

Timothy Trombley, Illinois State University (tetromb@ilstu.edu)

I evaluate the first Transcontinental Railroad from a corporate governance perspective. I show that the
controlling shareholders of the two companies that owned the rights to construct the first
Transcontinental Railroad both engaged in tunneling. They made above-market rate contracts with
companies that they controlled in order to expropriate cash flows for themselves, at the expense of
minority shareholders and the United States Government (which guaranteed the firms’ 2nd mortgage
bonds). Further, even though both organizations were caught, the Union Pacific was more severely
punished than the Central Pacific. I evaluate several possible reasons for this difference, and conclude
that the most satisfying explanation is that the public was furious at the benefits the Union Pacific
received from its political connections. This explanation could account for the literature’s finding that
surprisingly few modern American firms have politically connections despite the well-documented
benefits of political connections.