Long-Distance Trade and Long-Term Persistence

Do changes in the location of trading opportunities cause changes in the location of economic activity? I explore this question using a lifting of restrictions on trade across the Spanish Empire in the eighteenth century. I combine a difference-in-differences approach with a dynamic spatial model to examine this issue. I find that the reform improved market integration and induced urban growth, but had a smaller effect in locations with larger internal markets. The findings show that the location of economic activity adapts to changes in the location of trading opportunities, but persists when these changes are preceded by urban growth. (JEL F14, L92, N73, N76, O18, O19, R12)