Public Sector Agglomeration in Developed Countries: The Role of Oversight

A small but growing body of empirical research underscores the relationship between a city's status as a political capital and its status within an urban hierarchy. Both theoretical and empirical work has attributed this to the agglomeration effects of government activity in the capital. The hypothesis of this paper is that this agglomeration is driven by distance‐based transaction costs of oversight. This hypothesis is tested using a sample of U.S. metropolitan statistical areas for the years 2001–2008. The results are consistent with the hypothesis. Specifically, the empirical results indicate that greater distance from the capital is related to lower levels of government employment and expenditure per government employee among noncapital metropolitan areas.