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.
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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number
4638.
Find related papers by JEL classification: H70 - Public Economics - - State and Local Government; Intergovernmental Relations - - - General O18 - Economic Development, Technological Change, and Growth - - Economic Development - - - Regional, Urban, and Rural Analyses R10 - Urban, Rural, and Regional Economics - - General Regional Economics - - - General R50 - Urban, Rural, and Regional Economics - - Regional Government Analysis - - - General
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