Cattle, Steaks and Restaurants: Development Accounting when Space Matters
Péter Karádi and Miklós Koren
We conduct sector-level development accounting in a macro model where land and location play a role. Producers in agriculture, manufacturing and services choose their location to trade off transport costs to the city center and rents. We solve for the spatial equilibrium and show how space affects the aggregate production function and measured productivity. Studies not accounting for sector location will deem services in large, expensive cities unproductive. This biases development accounting because rich countries have large service-cities. Our preliminary calibrations show that, correcting for sector location, service productivity varies as much across countries as manufacturing productivity does. This is in contrast with previous studies that found smaller variation in service productivity.
Work in progress.