Working Paper: NBER ID: w19028
Authors: Filipe R. Campante; Quocanh Do; Bernardo V. Guimaraes
Abstract: 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.
Keywords: governance; capital cities; misgovernance; political economy; endogenous institutions
JEL Codes: D02; D74; D78; R12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| capital city isolation (R53) | misgovernance (D73) |
| misgovernance (D73) | capital city isolation (R53) |
| capital city isolation (R53) | less power sharing (D72) |
| capital city isolation (R53) | higher income premiums for capital city inhabitants (G52) |
| capital city isolation (R53) | lower military spending by ruling elites (H56) |