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We study the link between regional capitals and urban development. We exploit
new global data on hundreds of first-order administrative and capital city reforms
from 1987 until 2018 to estimate the capital city premium. Gaining capital status
increases city growth in the medium term, spilling over to nearby cities. The
capital premium varies with the size of the territory governed by the city, and
political status complements favorable economic fundamentals. We document two
mechanisms: migration of educated individuals to capital cities and heightened
public and private investment, with private investment favoring capital cities with
stronger economic fundamentals.
