Working Paper: CEPR ID: DP7018
Authors: Kristian Behrens; Frdric Robert-Nicoud
Abstract: Empirical studies consistently report that labour productivity and TFP rise with city size. The reason is that cities attract the most productive agents, select the best of them, and make the selected ones even more productive via various agglomeration economies. This paper provides a microeconomically founded model of vertical city differentiation in which the latter two mechanisms (`agglomeration' and `selection') operate simultaneously. Our model is both rich and tractable enough to allow for a detailed investigation of when cities emerge, what determines their size, and how they interact through the channels of trade. We then uncover stylised facts and suggestive econometric evidence that are consistent with the most distinctive equilibrium features of our model. We show, in particular, that larger cities are both more productive and more unequal (`polarised'), that inter-city trade is associated with higher income inequalities, and that the proximity of large urban centres inhibits the development of nearby cities.
Keywords: agglomeration; entrepreneur heterogeneity; firm selection; income inequalities; urban systems; urbanization
JEL Codes: F12; R12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Larger cities (R12) | Higher productivity (O49) |
| Larger cities (R12) | Increased income inequality (D31) |
| Agglomeration economies (R11) | Enhanced productivity of selected firms (O49) |
| Larger cities (R12) | Attract most productive agents (L85) |
| Competitive pressures (L11) | Further selection of productive agents (P42) |
| Survival of the fittest (L21) | Increased polarization (F69) |
| Intercity trade (F19) | Exacerbation of income inequalities (D31) |
| Proximity to larger urban centers (R11) | Inhibition of development of nearby smaller cities (R11) |