Capital cities: When do they stop growing?**I am grateful for the discussions with Friedel Bolle and Hermann Ribhegge, as well as for referee comments. Any remaining errors are nevertheless my own. A previous version of the paper circulated as How Do Capital Cities Trade?

This article is an attempt to explain a capital city's size. We assume away explanations such as exploitation of the capital city's hinterland. Instead, we emphasise the role of the localisation of government activity (i.e., administration or legislation) in the capital city for both the capital city economy and the hinterland economy. We assume in the model that larger regions benefit from agglomeration economies. We discuss the interaction of those agglomeration economies with an agglomeration diseconomy specific to the capital city. Under certain conditions, a stable population distribution between the capital city and its hinterland emerges where neither region captures the entire population. We also analyse the comparative statics properties of this stable equilibrium.