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Abstract: Public sector activities are often neglected in the economic approaches used to analyze the driving forces behind urban growth. The institutional status of a regional capital is a crucial aspect of public sector activities. This paper reports on a quasi‐natural experiment on county towns in East Germany. Since 1990, East German cities have demonstrated remarkable differences in population development. During this same period, many towns have lost their status as a county seat due to several administrative reforms. Using a difference‐in‐differences approach, we compare the annual population development of former county capitals to population change in towns that have successfully held on to their capital status throughout the observed period. The estimations show that losing county capital status has a statistically significant negative effect on annual changes in population. This effect continues to increase over time after the respective reforms have been implemented. [ABSTRACT FROM AUTHOR]