Working Paper: NBER ID: w16615
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: Urban Economics; City Size Distribution; Efficiency; Amenities; Frictions
JEL Codes: E1; R11; 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) |
| higher efficiency (H21) | greater frictions (F12) |
| better amenities (R53) | greater frictions (F12) |
| eliminating differences in city characteristics (R23) | significant population reallocations (R23) |
| eliminating efficiency differences (D61) | decrease in equilibrium utility levels (D59) |
| eliminating amenity differences (R28) | decrease in welfare (I38) |
| eliminating differences in city characteristics (R23) | many cities exit the market (R23) |
| eliminating efficiency differences in Chinese cities (R12) | welfare increase (I38) |