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Capitalitis? Effects of the 1960 Brazilian Capital Relocation

National and region capital cities are substantially larger than other cities in their countries and typically larger than would be predicted by Zipf’s law. Though this empirical regularity is well established in the urban economics literature, causal estimates of the effect of capital designation on city size are hard to obtain. I use the 1960 relocation of the Brazilian capital from Rio de Janeiro to Brasilia to identify the causal estimate of the effect of being a capital on city size, employment, and GDP. Using a synthetic controls strategy I find that losing the capital designation had no significant effects on Rio de Janeiro. In contrast, I find that Brasilia experienced large and significant increases in population, employment and GDP after being designated the new Brazilian capital. Further, these increases are not entirely explained by the mechanical movement of government workers to Brasilia; Instead, I find evidence of large spillovers in the private sector from this public sector shock. Finally, I show that some cities may violate the independence assumptions typically used when employing synthetic controls and I develop a method to deal with the resulting contamination of the donor units.