Working Paper: CEPR ID: DP4638
Authors: J. Vernon Henderson; Anthony J. Venables
Abstract: This Paper examines city formation in a country whose urban population is growing steadily over time, with new cities required to accommodate this growth. In contrast to most of the literature there is immobility of housing and urban infrastructure, and investment in these assets is taken on the basis of forward-looking behaviour. In the presence of these fixed assets cities form sequentially, without the population swings in existing cities that arise in current models. Equilibrium city size, absent government, may be larger or smaller than is efficient, depending on how urban externalities vary with population. Efficient formation of cities involves local government borrowing to finance development. The institutions governing land markets, leases, local taxation, and local borrowing and debt affect the efficiency of outcomes. The Paper explores the effects of different fiscal constraints, and shows that borrowing constraints lead cities to be larger than is efficient.
Keywords: city governance; city size; urban developers; urbanization
JEL Codes: H70; O18; R10; R50
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| borrowing constraints (F34) | city size (R12) |
| local government borrowing (H74) | efficient city formation (R38) |
| lack of effective local governance (H76) | inefficiencies in city formation (R11) |
| equilibrium city size (R12) | efficiency (D61) |
| city formation (N90) | urban growth dynamics (R11) |
| population growth (J11) | equilibrium city size (R12) |