Persistence and Path Dependence in the Spatial Economy
How much of the spatial distribution of economic activity today is determined by history rather than by geographic fundamentals? And if history matters for spatial allocations, does it also matter for overall efficiency? This paper develops a forward-looking dynamic framework for the theoretical and empirical study of such questions. We derive conditions on the strength of agglomeration externalities under which equilibria are unique and yet temporary historical shocks can have particularly persistent, or even permanent (i.e. path-dependent) consequences. When estimated using U.S. data from 1800-2000, this model displays multi-century persistence from small and temporary shocks as well as path dependence (with large aggregate welfare effects) throughout much of our estimated parameter range.
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