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Shocks and the spatial distribution of economic activity: The role of institutions

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  • Testa, Patrick A.

Abstract

Why do some historical shocks permanently impact local development, while others do not? This paper examines how institutions influence local recovery to population shocks, using a model with multiple regions and increasing returns to economic activity within regions. Extractive institutions crowd out productive activity, making its spatial coordination more difficult in the aftermath of large, negative shocks. Hence, when one region experiences such a shock, extractive institutions can hinder recovery, ensuring a redistribution of productive activity away from that region over the long-run. Using a dataset of major earthquakes and 1860 world cities from 1973 to 2018, I find sustained negative effects of earthquakes on city population growth, with effects being driven by cities located outside of stable democracies, consistent with the theory.

Suggested Citation

  • Testa, Patrick A., 2021. "Shocks and the spatial distribution of economic activity: The role of institutions," Journal of Economic Behavior & Organization, Elsevier, vol. 183(C), pages 791-810.
  • Handle: RePEc:eee:jeborg:v:183:y:2021:i:c:p:791-810
    DOI: 10.1016/j.jebo.2020.10.021
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    2. Jia, Junsheng & He, Xiaoyu & Zhu, Taiyu & Zhang, Eryu, 2023. "Does green finance reform promote corporate green innovation? Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 82(C).
    3. Jaap W.B. Bos & Jasmin Gröschl & Martien Lamers & Runliang Li & Mark Sanders & Vincent Schippers & Jasmin Katrin Gröschl, 2022. "How Do Institutions Affect the Impact of Natural Disasters?," CESifo Working Paper Series 10174, CESifo.
    4. Wei Wang & Haibo Wang, 2024. "Interconnected Markets: Exploring the Dynamic Relationship Between BRICS Stock Markets and Cryptocurrency," Papers 2406.07641, arXiv.org.
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    More about this item

    Keywords

    History dependence; Multiple equilibria; Institutions; Increasing returns; Earthquakes;
    All these keywords.

    JEL classification:

    • B52 - Schools of Economic Thought and Methodology - - Current Heterodox Approaches - - - Historical; Institutional; Evolutionary; Modern Monetary Theory;
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • P48 - Political Economy and Comparative Economic Systems - - Other Economic Systems - - - Legal Institutions; Property Rights; Natural Resources; Energy; Environment; Regional Studies
    • R12 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Size and Spatial Distributions of Regional Economic Activity; Interregional Trade (economic geography)

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