The Costs of Remoteness: Evidence from

oppositemincedManagement

Oct 28, 2013 (3 years and 5 months ago)

79 views

The Costs of Remoteness: Evidence from
German Division and Reunification


Stephen Redding

London School of Economics


Daniel Sturm

University of Munich

2

Motivation


What determines the spatial distribution of economic activity?


Main competing explanations:


Institutions


Natural Advantage


Market Access


Very difficult to empirically disentangle the effects of these
factors


3

This Paper


Exploit German division and reunification as a natural
experiment


Division of Germany exogenously reduced the market
access of West German cities close to the new East
-
West border relative to other West German cities


Reunification reverses this loss to some extent


Basic empirical strategy is diff
-
in
-
diffs. Compare:

a)
Population growth in W German cities close to the
new E
-
W German border to other W German cities

b)
Both before and after division.

4

Map 1


Germany in its pre
-

World War II borders

5

An Economic Geography Model


There are N locations which are endowed with an
exogenous stock of housing (immobile resource in fixed
supply)


Firms produce Dixit
-
Stiglitz varieties of a manufacturing
good with IRS and use labor as the only input


Manufacturing varieties are subject to (iceberg) transport
costs between locations


Consumers demand both housing and the manufacturing
varieties


Population is perfectly mobile across locations and
migration equalizes real wages


6

Empirical Implication


Suppose the N locations are divided by a closed border


Cities near to the new border experience a reduction in market
and supplier access relative to other cities


This reduction in market and supplier access will reduce their
equilibrium size relative to cities further from the border

7

8

9

Empirical Strategy


Difference in Differences Estimation:


Compare population growth in West German cities close
to the E
-
W border with West German cities distant from
the E
-
W border both before and after division


Examine the treatment effect of re
-
unification separately


Baseline Specification:




Basic specification considers a 75km border zone


10


We focus on a sample of West German Cities


We consider all West German cities which had a population
larger than 20,000 in 1919


We aggregate cities that merge during the sample period


This results in a sample of 119 West German cities of which 20
are within 75 km of the East
-
West German border.


Time Periods


Pre


WW II Germany

: 1919, 1925, 1933, 1939


Cold
-
War


: 1950, 1960, 1970, 1980, 1988


Reunification


: 1992, 2002

Description of the Data

11

12

13

14

The Role of Market Access


The decline of the border cities is consistent with our model


Institutions or natural endowments can not explain the
decline


However, there are at least three other possible explanations
for the decline:


Fear of further armed conflict


Differences in industrial structure


Differences in war related destruction


There are several pieces of evidence that the decline is
driven by a reduction in market access

15

16

Conclusions


Negative treatment effect of proximity to the East


West
border on city development in market
-
based West Germany


The evidence suggests that this treatment effect can be
largely explained by the change in market access


While institutions and natural advantage are certainly also
important, market access plays a substantial role in
determining economic prosperity


17

Thank You!

18

Non
-
parametric estimates

19

American and Russian Advance

20

Pre
-
WWI German and post
-
WWI Border Changes

21

Theoretical Model

(Henderson 1974, Helpman 1998)

Producer Behaviour

Consumer Behaviour

Trade costs

22

Equilibrium Nominal and Real Wages

Factor Mobility

Equilibrium Wages