The Geography of Path Dependence (joint with Dave Donaldson)

Abstract:

How much of the distribution of economic activity today is determined by history rather than by geographic fundamentals? And if history matters, does it matter much? We develop an empirical framework that enables answers to these questions. Our model combines a workhorse model of trade subject to geographic frictions with an overlapping generations model of labor mobility also subject to spatial fractions. Both production and consumption potentially exhibit local agglomeration and congestion externalities. We derive parameter conditions, for arbitrary static and dynamic geographic scenarios, under which equilibrium transition paths are unique and yet steady states may nevertheless be non-unique that is, where initial conditions (“history”) determine long-run steady-state outcomes (“path dependence”). We then estimate the model’s parameters (which govern the strength of agglomeration externalities and trade and migration frictions), by focusing on moment conditions that are robust to potential equilibrium multiplicity, using spatial variation across US counties from 1800 to the present. At these parameter estimates our simulations - based on randomly reassigning the geographical incidence of various shocks among members of similar regional clusters - imply the long arm of history has only small consequences for the distortions caused by spatial path dependence.