How Do Location Decisions of Firms and Households Affect Economic Development in Rural America?

This paper examines the causes of spatial inequalities in economic development across rural America. A theoretical model is developed to analyze interactions between location decisions of firms and households as they are affected by natural endowments, accumulated human and physical capital, and economic geography. Based on the theoretical analysis, an empirical model is specified to quantify the effect of these factors on key indicators of economic development across counties in the United States. Preliminary results suggest that households are willing to trade better amenities for lower income, and firms take advantage of this tradeoff by locating in areas with better climate and more recreational opportunities. In equilibrium, counties with better climate and more creational opportunities have lower income and more employment opportunities. Accumulated human and physical capital also significantly affect economic development across counties in the United States. Counties with more accumulated human and physical capital have higher income, more employment opportunities, and high development density. Remoteness has a negative effect on every measure of economic development indicator. It reduces income, employment, housing prices and total developed areas. Implications of the results for policy development to promote economic prosperity in rural America are discussed.