Working Paper: CEPR ID: DP18102
Authors: Gilles Duranton; Jessie Handbury
Abstract: A key reason for the existence of cities are the externalities created when people cluster together in close proximity. During Covid, such interactions came with health risks and people found other ways to interact. We document how cities changed during Covid and consider how the persistence of new ways of interacting, particularly remote work, will shape the development of cities in the future. We first summarize evidence showing how residential and commercial prices and activity adjusted at different distances from dense city centers during and since the pandemic. We use a textbook monocentric city model to demonstrate that two adjustments associated with remote work —reduced commuting times and increased housing demand—generate the patterns observed in the data. We then consider how these effects might be magnified by changes in urban amenities and agglomeration forces, and what such forces might mean for the future of cities.
Keywords: cities; COVID; monocentric model; endogenous amenities; agglomeration effects
JEL Codes: R12; R21; R31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| shift towards remote work (J62) | reduction in commuting costs (R48) |
| reduction in commuting costs (R48) | flattening of housing price gradient (R31) |
| flattening of housing price gradient (R31) | increase in housing prices in suburban areas (R31) |
| flattening of housing price gradient (R31) | decrease in housing prices near city centers (R31) |
| commuting dividend and home-office tax (H20) | increase in aggregate housing demand in suburban locations (R21) |
| home-office tax (H26) | reduction in effective utility derived from housing (R21) |