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Bones, Bombs, and Break Points The Geography of Economic Activity. Donald R. Davis and David E. Weinstein Columbia University and NBER. The Questions. The Central Question of EG is: Why does the density of economic activity vary? why vary across region? why vary across countries?
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Donald R. Davis and David E. Weinstein
Columbia University and NBER
The Central Question of EG is:
Why does the density of economic activity vary?
why vary across region?
why vary across countries?
why vary across regions within countries?
why vary across cities?
A) External Efforts (e.g. Henderson)
- Industry specific positive externalities
- General congestion effects
- Combination of these gives rise to variation in city sizes
b) NEG: Monopolies, competition and thick costs (FKU)
c) Other theories, (e.g. labor market pooling)
IRS forces a producer to choose a location choices are interdependent.
Producers want to be near demanders and input producers labor may be mobile and wants to be near producers.
Depending on stochastic process generating Cities. You can get very different sizes of cities.
- Some cities get a lot of positive shocks
Not a lot of economics underlying this but
- This theory can explain – Zipf’s law.
- IR cannot generate this
Krugman: a broad range of natural resources follow
Zipf: River flows
Each location is the sum of a long sequence of randomly distributed spatial qualities.
- river, coast, harbor, desert, mountaintop, rainfall, flatland, latitude, etc.
Can explain zipf’s law.
Difference with RG is response to temporary shocks
RG shocks are permanent
LF Temp shocks are temporary
We Look at Japanese Historical Data
Japan is a particularly good place because it is possible to conduct regional census data going back to 725
Also have data distribution of archaeological cities back to 6000 BC
II) Persistence if we go back to Stone Age/ Japan how much information does that give us about modern densities
- what about yayoi
- what about 1600
- In IRS world if you see a lot of persistence then you must believe in path den.
Henderson models do not because industries change.
- RG predicts persistence if near growth rate is high relative to variance
- LF predicts persistence
1) If econ were a laboratory science you would want to conduct experiments by cloning shocks to city sizes.
- Natural Experiment does same thing Allied bombing of Japan during WWII
What do our theories tell us.
I) IRS – suggests the possibility of catastrophes passing over critical values of city sizes has permanent effects. Are these catastrophes a central part of the data or are they a theoretical curiosity.
Can temporary economic policies permanently alter the geography of EA.
RG: this is a decisive test.
RG; Growth is a random walk
LF: Temporary shocks can have no permanent effects.
- How much is there
- What explains it.
2) FKU – without IRS we cannot understand the variation in regional dens.
- FKU quote
- Mfs belt – talk about his at various levels of aggregation.
Strategy: go back in time and ask
How much was there
Hypothesis Importance of IRS decreases as we go back in time
- Knowledge spillovers }
- RED } Less
- Linkages }
- Tech growth }
- Costs of tracks} more
Equality: = - perf inequality: = 0
Trad: Zipf run on cities/ agglon’s. Run on regional densities
Control for measurement error.
Correct w/ instr. of log size w/ correct log density.
Under main tide by that IRS held irp + earlier
If RG then low variance relative to means
LF clearly pred’s this
Do large temporary shocks have permanent effects on city size?
- 66 cities
- ½ of studies 2.2 mm bldgs
- 300, 000 killed
- 40% of population homeless
- some lost ½ of population