Persistence and Path Dependence in the Spatial Economy
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.
We are grateful to our discussants, Klaus Desmet, Jonathan Eaton, David Nagy, and David Weinstein, as well as to Rodrigo Adão, Kristian Behrens, Arnaud Costinot, Don Davis, Jonathan Dingel, Gilles Duranton, Cecile Gaubert, Rick Hornbeck, Jeffrey Lin, Vincent Lohmann, Robert Margo, Nathan Nunn, James Rauch, Steve Redding, Stuart Rosenthal, John Sturm, Ivan Werning and many seminar participants for comments that improved this paper. Richard Dionne and Yunus Tuncbilek provided excellent research assistance. This material is based upon work supported by the National Science Foundation under grant SES-1658838. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.