Working Paper: CEPR ID: DP8168
Authors: Klaus Desmet; Esteban Rossi-Hansberg
Abstract: This paper proposes a simple theory of a system of cities that decomposes the determinants of the city size distribution into three main components: efficiency, amenities, and frictions. Higher efficiency and better amenities lead to larger cities, but also to greater frictions through congestion and other negative effects of agglomeration. Using data on MSAs in the United States, we parametrize the model and empirically estimate efficiency, amenities and frictions. Counterfactual exercises show that all three characteristics are important in that eliminating any of them leads to large population reallocations, though the welfare effects from these reallocations are small. Overall, we find that the gains from worker mobility across cities are modest. When allowing for externalities, we find an important city selection effect: eliminating differences in any of the city characteristics causes many cities to exit. We apply the same methodology to Chinese cities and find welfare effects that are many times larger than in the U.S.
Keywords: amenities; china; city size; counterfactuals; efficiency; frictions; system of cities; united states; welfare
JEL Codes: R0; R12; R13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| higher efficiency (H21) | larger cities (R12) |
| better amenities (R53) | larger cities (R12) |
| greater frictions (F12) | larger cities (R12) |
| eliminating efficiency differences (D61) | population reallocations (R23) |
| eliminating amenity differences (R28) | population reallocations (R23) |
| eliminating frictions (F12) | population reallocations (R23) |
| eliminating efficiency differences (D61) | equilibrium utility levels decrease (D11) |
| eliminating amenity differences (R28) | welfare decrease (I38) |
| removal of differences in city characteristics (R23) | many cities exit (R12) |
| eliminating efficiency differences in Chinese cities (R12) | welfare increase (I38) |