Working Paper: NBER ID: w22823
Authors: David Albouy; Kristian Behrens; Frédéric Robert-Nicoud; Nathan Seegert
Abstract: The received economic wisdom is that cities are too big and that public policy should limit their sizes. This wisdom assumes, unrealistically, that city sites are homogeneous, migration is unfettered, land is given freely to incoming migrants, and federal taxes are neutral. Should those assumptions not hold, large cities may be inefficiently small. We prove this claim in a system of cities with heterogeneous sites and either free mobility or local governments, where agglomeration economies, congestion, federal taxation, and land ownership create wedges. A quantitative version of our model suggests that cities may well be too numerous and underpopulated for a wide range of plausible parameter values. The welfare costs of free migration equilibria appear small, whereas they seem substantial when local governments control city size.
Keywords: urban economics; population distribution; city size; fiscal externalities; site heterogeneity
JEL Codes: H73; J61; R12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Fiscal externalities (H39) | urban populations being smaller than socially optimal (R12) |
| Heterogeneous site quality (L15) | misallocation of populations across cities (R23) |
| federal taxation and land ownership dynamics (H20) | size of cities (R12) |
| Heterogeneous site quality (L15) | underutilization of high-quality sites (R53) |
| local governments exert control over city sizes (R12) | inefficient distribution of residents across cities (R23) |
| inefficiencies in city sizes (R12) | welfare costs of about 1% of real consumption (D69) |
| inefficiencies in city sizes (R12) | welfare costs of up to 18% under local government control (H79) |