Isolated Capital Cities and Misgovernance: Theory and Evidence

52 Pages Posted: 11 May 2013 Last revised: 30 Jun 2021

See all articles by Filipe R. Campante

Filipe R. Campante

Harvard University - Harvard Kennedy School (HKS)

Quoc-Anh Do

Sciences Po - Department of Economics; Centre for Economic Policy Research (CEPR)

Bernardo Guimaraes

Getulio Vargas Foundation (FGV) - Sao Paulo School of Economics

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Date Written: May 2013

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.

Suggested Citation

Campante, Filipe R. and Do, Quoc-Anh and Guimaraes, Bernardo, Isolated Capital Cities and Misgovernance: Theory and Evidence (May 2013). Available at SSRN: https://ssrn.com/abstract=2263611

Filipe R. Campante (Contact Author)

Harvard University - Harvard Kennedy School (HKS) ( email )

79 John F. Kennedy Street
Cambridge, MA 02138
United States
617-384-7958 (Phone)

Quoc-Anh Do

Sciences Po - Department of Economics ( email )

28 rue des Saints-Pères
Paris, 75007
France

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Bernardo Guimaraes

Getulio Vargas Foundation (FGV) - Sao Paulo School of Economics ( email )

Rua Itapeva, 474
Sao Paulo
Brazil

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