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Isolated Capital Cities and Misgovernance: Theory and Evidence

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  • Filipe R. Campante
  • Quoc-Anh Do
  • Bernardo V. Guimaraes

Abstract

Motivated by a novel stylized fact – countries with isolated capital cities display worse quality of governance – we provide a framework of endogenous institutional choice based on the idea that elites are constrained by the threat of rebellion, and that this threat is rendered less effective by distance from the seat of political power. In established democracies, the threat of insurgencies is not a binding constraint, and the model predicts no correlation between isolated capitals and misgovernance. In contrast, a correlation emerges in equilibrium in the case of autocracies. Causality runs both ways: broader power sharing (associated with better governance) means that any rents have to be shared more broadly, hence the elite has less of an incentive to protect its position by isolating the capital city; conversely, a more isolated capital city allows the elite to appropriate a larger share of output, so the costs of better governance for the elite, in terms of rents that would have to be shared, are larger. We show evidence that this pattern holds true robustly in the data. We also show that isolated capitals are associated with less power sharing, a larger income premium enjoyed by capital city inhabitants, and lower levels of military spending by ruling elites, as predicted by the theory.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 19028.

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Date of creation: May 2013
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Handle: RePEc:nbr:nberwo:19028

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  1. Ashraf, Quamrul & Galor, Oded & Özak, Ömer, 2009. "Isolation and Development," CEPR Discussion Papers 7531, C.E.P.R. Discussion Papers.
  2. Filipe R. Campante & Quoc-Anh Do, 2009. "A Centered Index of Spatial Concentration : Axiomatic Approach with an Application to Population and Capital Cities," Development Economics Working Papers 22059, East Asian Bureau of Economic Research.
  3. Filipe Campante & Edward L. Glaeser, 2009. "Yet Another Tale of Two Cities: Buenos Aires and Chicago," NBER Working Papers 15104, National Bureau of Economic Research, Inc.
  4. Roubini, Nouriel & Swagel, Phillip & Ozler, Sule & Alesina, Alberto, 1996. "Political Instability and Economic Growth," Scholarly Articles 4553024, Harvard University Department of Economics.
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  9. Daniel Kaufmann & Aart Kraay, 2002. "Growth without Governance," JOURNAL OF LACEA ECONOMIA, LACEA - LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION.
  10. Kaufmann, Daniel & Kraay, Aart & Mastruzzi, Massimo, 2010. "The worldwide governance indicators : methodology and analytical issues," Policy Research Working Paper Series 5430, The World Bank.
  11. Filipe R. Campante & Quoc-Anh Do, 2013. "Isolated Capital Cities, Accountability and Corruption: Evidence from US States," NBER Working Papers 19027, National Bureau of Economic Research, Inc.
  12. Davis, James C. & Henderson, J. Vernon, 2003. "Evidence on the political economy of the urbanization process," Journal of Urban Economics, Elsevier, vol. 53(1), pages 98-125, January.
  13. Nathan Nunn & Diego Puga, 2009. "Ruggedness: The Blessing of Bad Geography in Africa," NBER Working Papers 14918, National Bureau of Economic Research, Inc.
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Cited by:
  1. Filipe R Campante & Quoc-Anh Do, 2013. "Isolated Capital Cities, Accountability and Corruption Evidence from US States: Evidence from US States," Sciences Po Economics Discussion Papers 2013-01, Sciences Po Departement of Economics.
  2. Filipe R. Campante & Quoc-Anh Do, 2012. "Isolated Capital Cities, Accountability and Corruption: Evidence from US States," Working Papers 21-2012, Singapore Management University, School of Economics.
  3. Shaun Larcom & Mare Sarr & Tim Willems, 2014. "Dictators Walking the Mogadishu Line: How Men Become Monsters and Monsters Become Men," HiCN Working Papers 176, Households in Conflict Network.

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