The Agglomeration Trade-Off and Capital-City Location

Presentasjon v/ Nicholas Sheard, fra NTNU

Place: Høgskolen i Oslo og Akershus, Pilestredet 35, Auditorium pi531 Date and time: Thursday 30. March 2017 13:00 - 14.00

This paper studies how the location of a capital city affects the welfare of residents in the territory that it governs. The net benefit of having the capital in a particular location depends on a trade-off between the productivity benefits of having the capital near private producers and the higher costs of living that result from having activity concentrated in a larger or denser city. We estimate the net benefits using data from the capital cities of US states. For historical reasons many of these state capitals are in relatively small cities, in contrast to the norm in other parts of the world. To conduct the estimation we construct and parameterize a model for a spatial economy with private and public sectors that integrates the benefits and costs of agglomeration. By comparing the actual locations of state capitals with counterfactual scenarios in which the capital is the largest city in each state, we show that in many cases the actual locations lead to higher welfare for the state residents.