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Shocks and the spatial distribution of economic activity: The role of institutions

Patrick Testa ()

Journal of Economic Behavior & Organization, 2021, vol. 183, issue C, 791-810

Abstract: Why do some historical shocks permanently impact local development, while others do not? This paper examines how institutions influence local recovery to population shocks, using a model with multiple regions and increasing returns to economic activity within regions. Extractive institutions crowd out productive activity, making its spatial coordination more difficult in the aftermath of large, negative shocks. Hence, when one region experiences such a shock, extractive institutions can hinder recovery, ensuring a redistribution of productive activity away from that region over the long-run. Using a dataset of major earthquakes and 1860 world cities from 1973 to 2018, I find sustained negative effects of earthquakes on city population growth, with effects being driven by cities located outside of stable democracies, consistent with the theory.

Keywords: History dependence; Multiple equilibria; Institutions; Increasing returns; Earthquakes (search for similar items in EconPapers)
JEL-codes: B52 C72 J24 P48 R12 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1016/j.jebo.2020.10.021

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Journal of Economic Behavior & Organization is currently edited by Houser, D. and Puzzello, D.

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