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City location and economic development

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  • David Nagy

    (Princeton University)

Abstract

I present a dynamic model of the U.S. economy with trade, labor mobility, endogenous growth and realistic geography to examine the relationship between spatial frictions, city formation, and aggregate development. In the model, a subset of locations endogenously specialize in innovative industries that are subject to economies of scale. This leads to the formation and development of cities. Spatial frictions affect innovation, thus aggregate growth, by shaping the locations and sizes of cities. I take the model to historical U.S. data at a 20 by 20 arc minute spatial resolution. I show that the model can quantitatively replicate the large population reallocation toward the West and the rapid urbanization in the 19th century, as well as various moments of the location and growth of newly forming cities. I use the model to quantify the effects of railroad construction and international trade on city formation, aggregate output, and growth. Results indicate that railroads were responsible for 23% of U.S. growth before the Civil War, while international trade accounted for 1.4% of U.S. growth. I also show that the formation and development of cities amplified the effects of railroads and international trade on real GDP by about 40%.

Suggested Citation

  • David Nagy, 2016. "City location and economic development," 2016 Meeting Papers 307, Society for Economic Dynamics.
    • Handle: RePEc:red:sed016:307
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    Cited by:

    1. Pablo D. Fajgelbaum & Edouard Schaal, 2020. "Optimal Transport Networks in Spatial Equilibrium," Econometrica, Econometric Society, vol. 88(4), pages 1411-1452, July.
    2. Fabian Eckert & Michael Peters, 2018. "Spatial Structural Change," 2018 Meeting Papers 98, Society for Economic Dynamics.
    3. Despina Gavresi & Anastasia Litina & George Tsiachtsiras, 2022. "Railways and Roadways to Trust," Discussion Paper Series 2022_08, Department of Economics, University of Macedonia, revised Sep 2022.
    4. Santamaria, Marta, 2020. "Reshaping Infrastructure: Evidence from the division of Germany," The Warwick Economics Research Paper Series (TWERPS) 1244, University of Warwick, Department of Economics.
    5. Santamaria, Marta, 2020. "Reshaping Infrastructure : Evidence from the division of Germany," CAGE Online Working Paper Series 456, Competitive Advantage in the Global Economy (CAGE).
    6. Matthew Delventhal, 2019. "The Globe as a Network: Geography and the Origins of the World Income Distribution," 2019 Meeting Papers 840, Society for Economic Dynamics.
    7. Van Leemput, Eva, 2021. "A passage to India: Quantifying internal and external barriers to trade," Journal of International Economics, Elsevier, vol. 131(C).
    8. Jason Query, 2020. "Differing trade elasticities for intra‐ and international distances: A gravity approach," Review of International Economics, Wiley Blackwell, vol. 28(3), pages 913-929, August.

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