History and industry location: evidence from German airports

Abstract

A central prediction of a large class of theoretical models is that industry location is not necessarily uniquely determined by fundamentals. In these models, historical accident or expectations determine which of several steady-state locations is selected. Despite the theoretical prominence of these ideas, there is surprisingly little systematic evidence on their empirical relevance. This paper exploits the combination of the division of Germany as an exogenous shock to industry location. We focus on a particular economic activity and establish that division caused a shift of Germany's air hub from Berlin to Frankfurt and there is no evidence of a return of the air hub to Berlin after reunification. We develop a body of evidence that the relocation of the air hub is not driven by a change in economic fundamentals but is instead a shift between multiple steady-states