An Ongoing Reversal of Fortune Among Russian Cities: City Age, Natural Resources, and Changing Spatial Income Distribution

Abstract

This paper documents the negative link between the age of Russian cities and their average wage. This link is robust to various definitions of city age and sample censuring, the inclusion of regional and time fixed effects, dependent variable spatial lag and many urban characteristics. This link is revealed especially for cities founded after the Soviet industrialization and for upper quintiles of cities by their average wage. To determine a mechanism behind the established fact, hypotheses as to spatial patterns of economic performance are discussed, including the increasing return hypothesis, the institutions hypothesis and the geography hypothesis. Following the sophisticated version of the geography hypothesis, a model of growth in n-city and two-sector economy is developed. The model replicates the link between age and per capita income and contains testable hypotheses that enable one to check whether a mechanism outlined in the model is behind the link between city age and wage. Our empirical strategy is based on a quasi-experiment, in which the treatment effect is made by time and various age groups of the cities are broken up into treatment and control groups. The results are strongly in favor of the sophisticated geography hypothesis. The revealed mechanism suggests that the changing spatial patterns of wage differentials are explained by the changing remaining stocks of natural resources. Older cities are getting relatively poorer due to the shrinking of their remaining resource stocks, while new cities are emerging in resource-rich territories with the respective income advantages.