Essays on Spatial Development by Alexander David Rothenberg A dissertation submitted in partial satisfaction of the requirements for the degree of Doctor of Philosophy in Economics in the GRADUATE DIVISION of the UNIVERSITY OF CALIFORNIA, BERKELEY Committee in charge: Professor Bryan S. Graham, Chair Professor Edward Miguel Professor Patrick Kline Professor Robert Helsley Spring 2012 Essays on Spatial Development Copyright 2012 by Alexander David Rothenberg Abstract Essays on Spatial Development by Alexander David Rothenberg Doctor of Philosophy in Economics University of California, Berkeley Professor Bryan S. Graham, Chair This dissertation contains three essays on the relationship between the spatial distribution of economic activity and di↵erent types of public goods. In the first essay, I study how changes in transport infrastructure a↵ect the location decisions of firms by examining how manufacturers responded to changes in road quality in Indonesia. Using new data, I docu- ment massive upgrades to Indonesia’s highway networks during the 1990s, a period in which national transportation funding increased by 83 percent. I first show that these road im- provements were accompanied by a significant dispersion of manufacturing activity, and that di↵erent industries responded in ways predicted by theory. To make better counterfactual predictions, I develop a structural model of location choice in which firms face a trade o↵: locating closer to demand sources requires firms to pay higher factor prices. The model predicts that some location characteristics relevant to firms are determined in equilibrium, necessitating the use of instrumental variables. I estimate a random coefficients logit model with endogenous choice characteristics and find significant di↵erences in firms’ willingness to pay for greater market access across di↵erent industrial sectors. Counterfactual policy simu- lations suggest that new toll roads connecting urban areas would cause a modest amount of industrial suburbanization. In contrast, upgrading rural roads would have little or no e↵ect on equilibrium firm locations. In the second essay, co-authored with Bryan Graham, we provide estimates of the im- plicit prices that consumers and firms pay for access to infrastructure in Honduras. Without credible estimates of the welfare e↵ects of infrastructure improvements, it is impossible for policymakers to know whether the benefits of these investments outweigh their substantial costs. A major challenge with trying to understanding the welfare consequences of improved transport infrastructure is an identification problem: transport improvements are never ran- domly assigned. We overcome this identification program by exploiting variation from a novel natural experiment: Honduras’ infestation with Panama disease. The Honduran rail- road network was constructed by fruit companies to ship bananas from plantations to port cities, but because of an unpredictable outbreak of Panama disease, major plantations and 1 their associated railway infrastructure were abandoned. We argue that outbreaks of Panama disease were extremely difficult to predict, and because of this, conditional on the railway network that existed in the 1930s and a host of observable characteristics, the areas where railway lines were abandoned were randomly assigned. We use our identification strategy to uncover the implicit prices of access to infrastructure paid by consumers and the implicit production costs paid by firms. In the third essay, co-authored with Rachel Glennerster and Edward Miguel, we study how spatial variation in ethnic diversity, which exists largely for historical reasons, a↵ects the provision of local public goods in rural Sierra Leone. Scholars have pointed to ethnic di- visions as a leading cause of underdevelopment, due in part to their adverse e↵ects on public goods. We investigate this issue in post-war Sierra Leone, one of the world’s poorest coun- tries. To address concerns over endogenous local ethnic composition, we use an instrumental variables strategy relying on historical census data on ethnic composition. We find that local diversity is not associated with worse public goods provision across a variety of outcomes, specifications, and diversity measures, with precisely estimated zeros. We investigate the role that leading mechanisms proposed in the literature play in generating the findings. 2 To Sarah, with all of my love. i Contents Abstract 1 Acknowledgements viii 1 Transport Infrastructure and Firm Location Choice in Equilibrium 1 1.1 Introduction................................... 2 1.2 Roads and Manufacturing in Indonesia . 6 1.3 Data and Measurement . 7 1.3.1 Spatial Unit of Analysis . 8 1.3.2 Data on Road Quality . 8 1.3.3 Measuring Transport Costs . 9 1.3.4 Survey of Manufacturing Firms . 11 1.4 Trends in Industrial Location . 12 1.4.1 Measures of Spatial Concentration . 12 1.4.2 Regional Trends . 14 1.4.3 Regression Analysis . 14 1.4.4 Summary . 17 1.5 Structural Model . 17 1.5.1 Setup . 18 1.5.2 Consumer Preferences . 18 1.5.3 Agriculture . 19 1.5.4 Manufacturing and Trade . 20 1.5.5 Firm Location Choices . 23 1.5.6 Identification of the Choice Model . 24 1.5.7 Estimation of the Choice Model . 26 1.6 Results ..................................... 27 1.6.1 Constant Coefficient Logit Results . 27 1.6.2 Random Coefficient Logit Results . 30 1.7 Counterfactual Simulations . 31 1.7.1 Overview: Trans-Java Expressway and Rural Road Upgrades . 31 1.7.2 Reduced Form Prediction . 33 ii 1.7.3 Model-Based Upper Bound . 33 1.7.4 Full Structural Prediction . 34 1.7.5 Simulation Results . 35 1.8 Conclusion . 36 1.A Derivations for the Model and Counterfactuals . 55 1.A.1 Consumer Demands . 55 1.A.2 Firm Pricing . 56 1.A.3 Firm Outputs at Counterfactual Locations . 57 1.A.4 Counterfactual Factor Demands . 59 1.B Logit Model Estimation . 59 1.B.1 Interactions ................................ 61 1.B.2 Details: Step 1 . 62 1.B.3 Standard Errors . 66 1.C Data Appendix . 68 1.C.1 Road Quality Data . 68 1.C.2 Administrative Boundaries . 71 1.C.3 Spatial, Topographical, and Agro-climatic Variables . 74 2 The Benefits of Transport Infrastructure: Evidence from Honduras 98 2.1 Introduction................................... 98 2.2 Bananas, Railroads, and Panama Disease . 100 2.2.1 Fruit Companies and the Banana Trade . 101 2.2.2 The Gros Michel and Panama Disease . 102 2.2.3 Abandonment of Plantations . 103 2.2.4 Conditional Random Abandonment . 104 2.3 Model ...................................... 104 2.3.1 Implicit Prices . 105 2.3.2 Cost of Production . 106 2.4 Data ....................................... 106 2.4.1 Spatial Unit of Analysis . 107 2.4.2 Infrastructure Maps and Access to Railroads . 107 2.4.3 Census Data . 108 2.4.4 Terrain Variables . 109 2.5 Results ..................................... 110 2.5.1 Selection and Abandonment . 110 2.5.2 Persistent Changes in Infrastructure . 111 2.5.3 E↵ectsonWages,Rents,andDensity . 112 2.5.4 Implicit Prices and Production Costs for Abandonment . 114 2.6 Conclusion . 115 2.A Data Appendix . 134 iii 2.A.1 1887 Census . 134 2.A.2 1988 Household Census Data . 134 2.A.3 1952 Agricultural Census Data . 135 2.A.4 2001 Household Census Data . 135 2.A.5 Administrative Boundary Shapefile . 135 2.A.6 Infrastructure Maps: Projection Information . 136 2.A.7 Infrastructure Maps, 2001 . 137 2.B ENCOVIData.................................. 137 2.C Ruggedness ................................... 138 3 Collective Action in Diverse Sierra Leone Communities 145 3.A Introduction................................... 145 3.B Background on Economic Development and Ethnicity Sierra Leone . 149 3.C Migration and the Persistence of Local Ethnic Composition . 151 3.C.1 Revealed Preferences for Ethnic Sorting . 151 3.C.2 Using Historical Data to Identify the Impact of Ethnic Diversity . 153 3.D Estimation and Data . 156 3.D.1 Regression Specifications . 156 3.D.2 Local Measures of Public Goods, Collective Action, Social Capital and School Quality . 158 3.E Impacts of Ethnic Diversity on Local Public Goods, Social Capital, Disputes and Schools . 160 3.F Explaining the weak relationship between diversity and local outcomes in SierraLeone................................... 163 3.F.1 Overview of Colonial History . 163 3.F.2 Politics and Civil War in Post-Independence Sierra Leone, 1961-present 166 3.F.3 The Legacies of Colonial “Decentralized Despotism” and Slavery . 167 3.F.4 Empirical Evidence on the Role of “Strong” Chiefs . 168 3.G Conclusion.................................... 169 3.A Appendix Tables and Figures . 182 3.B Discrete Choice Models with Choice-Based Sampling and Survey Weights . 196 3.C Mapping 1963 Chiefdoms to 2004 Chiefdoms . 196 3.D Mean E↵ects Analysis . 197 3.E Data Appendix . 197 3.E.1 National Public Services Surveys, 2005 and 2007 . 197 3.E.2 Sierra Leone School Monitoring Survey, 2005 . 197 3.E.3 Sierra Leone Household Census, 1963 and 2004 . 198 3.E.4 Sierra Leone Chief and Local Councilors Survey, 2008 . 198 3.E.5 No Peace Without Justice (NPWJ) Report, 2004 . 198 3.E.6 Geographic Information Systems (GIS) Data . 198 iv List of Figures 1.1 Evolution of Pavement on Java’s Road Network . 47 1.2 Evolution of Pavement on Sumatra’s Road Network . 48 1.3 Evolution of Pavement on Sulawesi’s Road Network . 49 1.4 Trends in the Ellison and Glaeser (1997) Index . 50 1.5 Share of New Firms Locating in Di↵erent Types of Kabupatens . 51 1.6 Partially Linear Regression . 52 1.7 Non-Linear Distance Function . 53 1.8 MapoftheTrans-JavaExpressway ..................... 54 1.C.1 Roughness and Surface Type . 79 1.C.2 Roads and Port Linkeages: Java, Sumatra, and Sulawesi . 80 1.C.1 Average Travel Times: Java . 91 1.C.2 Average Travel Times: Sumatera . 92 1.C.3 Average Travel Times: Sulawesi . 93 1.C.4 Trends in the Ellison and Glaeser (1997) Index . 94 1.C.5 Evolution of New Firm Counts and Industrial Concentration (Using Kabu- paten Definitions) .