Essays on the Spatial Distribution of Economic Activities Yi Jie Gwee Submitted in partial fulfillment of the requirements for the degree of Doctor of Philosophy under the Executive Committee of the Graduate School of Arts and Sciences COLUMBIA UNIVERSITY 2021 © 2021 Yi Jie Gwee All Rights Reserved Abstract Essays on the Spatial Distribution of Economic Activities Yi Jie Gwee This dissertation consists of three chapters that examine the spatial distribution of economic activities. The first chapter, co-authored with Jacob Field and Di Song Tan, examines how disasters as well as individuals’ expectations of what others will do affect the development of cities. The development of cities often involves the rejuvenation or replacement of existing structures. However, history, in the form of the sunk cost of existing durable structures, often serves as an impediment to urban development. In theory, by reducing the opportunity cost of waiting to rebuild to zero, disasters can eliminate these frictions and bring about higher quality structures. In addition, the simultaneous rebuilding after a disaster would allow property owners to experience stronger cross- building spillovers which would encourage further upgrades of nearby buildings. Nevertheless, these are not sufficient to guarantee higher quality buildings. This is because individuals’ investment decisions also depend on their expectations of what others will do. Therefore, in this chapter, we examine both of these issues using the 1666 Great Fire of London as a natural experiment. First, using a difference-in-differences (DiD) strategy, we show evidence that the Fire was able to free parishes within London from the constraints of their existing durable structures and move them to a new equilibrium involving higher quality structures. Second, using DiD and an IV strategy, we find that legal rulings arising from the Fire Court – a court specially set up by the English Parliament to hear rebuilding disputes – were able to anchor expectations and in so doing, helped to facilitate the development of London. Providing causal evidence that legal rulings can be a main driver in the formation of expectations is the main contribution of our paper. The second chapter examines how the quirks of history shape present-day economic outcomes. Building on Bazzi et al. (2020), I study how a particular episode of history – time at the frontier – helps to explain the present-day manufacturing production patterns across American counties. First, I show empirical evidence that there are fewer establishments and lower employment in counties that spent a longer time on the frontier. The same results hold for industries that are more “contractible” (i.e., easier to specify in contracts and hence less susceptible to holdup). Second, using a DiD strategy, I show that firms in high “contractibility” industries sort into producing at counties that spent a longer time on the frontier. I hypothesize that due to “rugged individualism”, individuals in counties that spent a longer time on the frontier are less likely to trust other people. Therefore, anything that is not “contractible” becomes harder and more costly to enforce. Consequently, only the more “contractible” industries locate in counties that spent a longer time on the frontier. The third chapter, co-authored with Di Song Tan, examines how land use regulations and NIMBY (“not in my back yard”) behavior affect housing prices in the UK. In the UK, developers have to apply to the local planning authority to seek development permission. Applicants who have their plans rejected can appeal to the Secretary of State, via the Planning Inspectorate. The Planning Inspectorate then assigns an inspector to decide whether to overturn the local authority’s decision. We propose a theoretical model which shows that in locations with high levels of NIMBY-ism, developers are better off getting their plans rejected by the local authority and gambling on drawing an inspector who is less sympathetic towards locals’ NIMBY behavior. Our empirical strategy exploits the fact that inspectors are quasi-randomly assigned to the appeals. This allows us to use inspector leniency as an instrument for whether an appeal is successful. We find that overturning the local authority’s decision does not lead to a large fall in housing prices. For some projects, the impact may in fact be positive because they also add to local amenities such as retail shops. This suggests a prevalence of NIMBY-ism, as locals pressure authorities to reject even relatively benign projects. Table of Contents List of Figures .......................................... vii List of Tables .......................................... xi Acknowledgments ........................................ xv Dedication ............................................ xv Chapter 1: Great Expectations: Urban Development in 17th Century London (with Jacob Field and Di Song Tan) .............................. 1 1.1 Introduction . 1 1.2 Historical Background: The 1666 Great Fire of London . 6 1.3 Data . 9 1.4 The Effect of the Fire . 16 1.4.1 Empirical strategy . 16 1.4.2 Results and discussion . 17 1.4.3 Robustness checks . 22 1.5 The Effect of Pragmatic Legal Rulings . 26 1.5.1 Overview . 26 1.5.2 Defining pragmatic legal rulings . 26 1.5.3 Model: Legal rulings, expectations and investment . 27 i 1.5.4 Empirical strategy . 35 1.5.5 Results and discussion . 36 1.5.6 Competing hypotheses/mechanisms . 42 1.5.7 Robustness checks . 45 1.5.8 Using an IV estimation strategy . 46 1.6 Conclusion . 53 Chapter 2: Made by History: The Spatial Distribution of Manufacturing Industries in the US 54 2.1 Introduction . 54 2.2 Conceptual framework . 60 2.2.1 Overview . 60 2.2.2 Consumers . 61 2.2.3 Firms . 62 2.2.4 Comparative statics . 66 2.2.5 Graphical example . 68 2.2.6 Empirical implications . 69 2.3 Background and data . 70 2.3.1 History: The amount of time that the county spent on the frontier . 70 2.3.2 Industries: Define industries based on how “contractible” inputs are . 70 2.3.3 Concordance and suppression of data . 71 2.4 Outcomes at the county level and the industry level . 73 2.4.1 Outcomes at the county level . 73 2.4.2 Outcomes at the industry level . 75 ii 2.5 Sorting of industries to counties . 77 2.5.1 Results and discussion . 77 2.5.2 Robustness checks . 82 2.6 Potential mechanisms behind the sorting pattern . 85 2.6.1 First-mover advantage of industries . 85 2.6.2 Culture and institutions . 90 2.7 Conclusion . 91 Chapter 3: The Inspector Calls: The Effect of Local Land Use Regulations and NIMBY-ism on Housing Prices (with Di Song Tan) ...................... 93 3.1 Introduction . 93 3.2 Background to Land Use Regulations in the UK . 98 3.2.1 Overview . 98 3.3 Model . 101 3.3.1 Overview . 101 3.3.2 Stage 4: Household behavior and market clearing . 102 3.3.3 Stage 3: Inspector decides whether to overturn the local planning authority’s decision . 104 3.3.4 Stage 2: Local planning authority decides whether to accept or reject the developer’s proposed plan . 105 3.3.5 Stage 1: Developer proposes a development plan . 106 3.3.6 Selection into appeals . 108 3.3.7 Implications of selection on price regressions . 109 3.4 Data . 110 3.4.1 Description of datasets . 110 iii 3.4.2 Sample for regression . 112 3.4.3 What happens after a successful appeal? . 115 3.5 Empirical strategy . 117 3.5.1 Overview . 117 3.5.2 Limitations to difference-in-differences . 118 3.5.3 Instrumental variable calculation . 119 3.5.4 Validating the IV strategy . 121 3.6 Results . 125 3.6.1 Heterogeneous effects . 128 3.6.2 Mechanisms . 130 3.7 Conclusion . 136 References ............................................ 137 Appendix A: Appendix to Great Expectations: Urban Development in 17th Century London 154 A.1 The effect of the Fire on quantity . 154 A.2 Discussion about Jensen’s inequality . 156 A.3 Additional figures and tables . 160 A.4 Additional results . 164 Appendix B: Appendix to Made by History: The Spatial Distribution of Manufacturing Industries in the US ............................... 175 B.1 Mathematical Appendix . 175 B.1.1 Microfounding the fixed costs associated with producing in each county . 175 B.1.2 Derivation of Equation 2.1 . 179 iv B.1.3 Derivation of @Jc ...............................181 @φc B.2 Additional figures and tables . 182 Appendix C: Appendix to The Inspector Calls: The Effect of Local Land Use Regulations and NIMBY-ism on Housing Prices ...................... 192 C.1 Mathematical Appendix . 192 C.1.1 Proof of Proposition 1 . 192 C.1.2 Proof of Proposition 2 . 194 C.2 Additional figures and tables . 195 v List of Figures 1.1 Regression sample . 15 1.2 Distribution of the share of pragmatic rulings across parishes . 35 2.1 Simple example of model . 69 2.2 Binned scatter plot of the residues . 80 2.3 Relationship between past and present “contractibility” . 89 3.1 Comparison of new dwellings in appeal sites, by success of appeal . 116 3.2 Unconditional mean log price by appeal decision . 117 3.3 Difference in prices relative to 3 years before appeal decision ..