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Isolated Capital Cities and Misgovernance: Theory and Evidence

  • Campante, Filipe R.

    (Harvard University)

  • Do, Quoc-Anh

    (Sciences Po, Paris)

  • Guimaraes, Bernardo

    (Sao Paulo School of Economics)

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 Harvard University, John F. Kennedy School of Government in its series Working Paper Series with number rwp12-058.

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Date of creation: Dec 2012
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Handle: RePEc:ecl:harjfk:rwp12-058
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  1. Campante, Filipe R. & Do, Quoc-Anh, 2009. "A Centered Index of Spatial Concentration: Axiomatic Approach with an Application to Population and Capital Cities," Working Paper Series rwp09-005, Harvard University, John F. Kennedy School of Government.
  2. Quamrul Ashraf & Oded Galor & Omer Ozak, 2009. "Isolation and Development," Working Papers 2009-9, Brown University, Department of Economics.
  3. Acemoglu, Daron & Johnson, Simon & Robinson, James A., 2005. "Institutions as a Fundamental Cause of Long-Run Growth," Handbook of Economic Growth, in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 1, chapter 6, pages 385-472 Elsevier.
  4. Kaufmann, Daniel & Kraay, Aart & Mastruzzi, Massimo, 2010. "The worldwide governance indicators : methodology and analytical issues," Policy Research Working Paper Series 5430, The World Bank.
  5. Nathan Nunn & Diego Puga, 2012. "Ruggedness: The Blessing of Bad Geography in Africa," The Review of Economics and Statistics, MIT Press, vol. 94(1), pages 20-36, February.
  6. 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.
  7. Edward Glaeser & Giacomo Ponzetto & Andrei Shleifer, 2006. "Why Does Democracy Need Education?," NBER Working Papers 12128, National Bureau of Economic Research, Inc.
  8. 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.
  9. Glaeser, E.L. & Ades, A.F., 1993. "Trade and Circuses: Explaining Urban Giants," Harvard Institute of Economic Research Working Papers 1646, Harvard - Institute of Economic Research.
  10. 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.
  11. Claudio Ferraz & Frederico Finan, 2008. "Exposing Corrupt Politicians: The Effects of Brazil's Publicly Released Audits on Electoral Outcomes," The Quarterly Journal of Economics, MIT Press, vol. 123(2), pages 703-745, 05.
  12. Guimarães, Bernardo & Sheedy, Kevin D., 2012. "A Model of Equilibrium Institutions," CEPR Discussion Papers 8855, C.E.P.R. Discussion Papers.
  13. Kaufmann, Daniel & Kraay, Aart, 2002. "Growth without governance," Policy Research Working Paper Series 2928, The World Bank.
  14. Qi Li & Jeffrey Scott Racine, 2006. "Nonparametric Econometrics: Theory and Practice," Economics Books, Princeton University Press, edition 1, volume 1, number 8355, April.
  15. Timothy Besley & Torsten Persson, 2009. "The Origins of State Capacity: Property Rights, Taxation, and Politics," American Economic Review, American Economic Association, vol. 99(4), pages 1218-44, September.
  16. Alberto Alesina & Sule Ozler & Nouriel Roubini & Phillip Swagel, 1992. "Political Instability and Economic Growth," NBER Working Papers 4173, National Bureau of Economic Research, Inc.
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