Seminario 19/18: David Nagy (CXREI-Universitat Pompeu Fabra) – City Location and Economic Development

Abstract:I present a dynamic model of the U.S. economy with trade, labor mobility, endogenous growth and realistic geography to examine the relationship between spatial frictions, city formation and aggregate development. In the model, a subset of locations endogenously specialize in innovative industries that are subject to economies of scale. This leads to the formation and development of cities. Spatial frictions affect innovation, thus aggregate growth, by shaping the locations and sizes of cities. I take the model to historical U.S. data at a 20 by 20 arc minute spatial resolution. I show that the model can quantitatively replicate the large population reallocation toward the West and the rapid urbanization in the 19th century, as well as various moments of the location and growth of newly forming cities. I use the model to quantify how the construction of the U.S. railroad network affected city formation, aggregate output and growth. Results indicate that railroads were responsible for 27% of U.S. growth before the Civil War, increasing U.S. real GDP by 9.3% in 1860. I also show that the formation and development of cities amplified the effects of railroads on real GDP by at least 18%.