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Persistence and Path Dependence in the Spatial Economy

Treb Allen and Dave Donaldson

No 28059, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: How much of the spatial distribution of economic activity today is determined by history rather than by geographic fundamentals? And if history matters for the distribution, does it also affect overall efficiency? This paper develops a tractable theoretical and empirical framework that aims to provide answers to these questions. We derive conditions on the strength of agglomeration externalities, valid for any geography, under which temporary historical shocks can have extremely persistent effects and even permanent consequences (path dependence). We also obtain new analytical expressions, functions of the particular geography in question, that bound the aggregate welfare level that can be sustained in any steady-state, thereby bounding the potential impact of history. Our simulations—based on parameters estimated from spatial variation across U.S. counties from 1800-2000—imply that small variations in historical conditions have substantial consequences for both the spatial distribution and the efficiency of U.S. economic activity, both today and in the long-run.

JEL-codes: C33 C62 F1 R11 R13 R23 (search for similar items in EconPapers)
Date: 2020-11
New Economics Papers: this item is included in nep-geo, nep-gro, nep-his and nep-ure
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