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Urban structure and growth

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  • Esteban Rossi-Hansberg
  • Mark L. J. Wright

Abstract

Most economic activity occurs in cities. This creates a tension between local increasing returns, implied by the existence of cities, and aggregate constant returns, implied by balanced growth. To address this tension, we develop a theory of economic growth in an urban environment. We show how the urban structure is the margin that eliminates local increasing returns to yield constant returns to scale in the aggregate, thereby implying a city size distribution that is well described by a power distribution with coefficient one: Zipf's Law. Under strong assumptions our theory produces Zipf's Law exactly. More generally, it produces the systematic deviations from Zipf's Law observed in the data, namely, the underrepresentation of small cities and the absence of very large ones. In these cases, the model identifies the standard deviation of industry productivity shocks as the key element determining dispersion in the city size distribution. We present evidence that the dispersion of city sizes is consistent with the dispersion of productivity shocks in the data.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Minneapolis in its series Discussion Paper / Institute for Empirical Macroeconomics with number 141.

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Date of creation: 2003
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Handle: RePEc:fip:fedmem:141

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  1. Henry G. Overman & Yannis Ioannides, 2000. "Zipf's law for cities: an empirical examination," LSE Research Online Documents on Economics 20136, London School of Economics and Political Science, LSE Library.
  2. Esteban Rossi-Hansberg & Mark L. J. Wright, 2006. "Urban structure and growth," Staff Report 381, Federal Reserve Bank of Minneapolis.
  3. Romer, Paul M, 1990. "Endogenous Technological Change," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages S71-102, October.
  4. Henderson, J V, 1974. "The Sizes and Types of Cities," American Economic Review, American Economic Association, vol. 64(4), pages 640-56, September.
  5. Gilles Duranton, 2007. "Urban Evolutions: The Fast, the Slow, and the Still," American Economic Review, American Economic Association, vol. 97(1), pages 197-221, March.
  6. Henderson, J. Vernon, 2005. "Urbanization and Growth," Handbook of Economic Growth, in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 1, chapter 24, pages 1543-1591 Elsevier.
  7. Kwok Tong Soo, 2004. "Zipfs Law for Cities: A Cross Country Investigation," CEP Discussion Papers dp0641, Centre for Economic Performance, LSE.
  8. Xavier Gabaix, 1999. "Zipf's Law and the Growth of Cities," American Economic Review, American Economic Association, vol. 89(2), pages 129-132, May.
  9. Jonathan Eaton & Zvi Eckstein, 1994. "Cities and Growth: Theory and Evidence from France and Japan," NBER Working Papers 4612, National Bureau of Economic Research, Inc.
  10. Charles I. Jones, 1999. "Growth: With or Without Scale Effects?," American Economic Review, American Economic Association, vol. 89(2), pages 139-144, May.
  11. Au, Chun-Chung & Henderson, J. Vernon, 2006. "How migration restrictions limit agglomeration and productivity in China," Journal of Development Economics, Elsevier, vol. 80(2), pages 350-388, August.
  12. Esteban Rossi-Hansberg & Mark L.J. Wright, 2005. "Firm Size Dynamics in the Aggregate Economy," NBER Working Papers 11261, National Bureau of Economic Research, Inc.
  13. Jan Eeckhout, 2004. "Gibrat's Law for (All) Cities," American Economic Review, American Economic Association, vol. 94(5), pages 1429-1451, December.
  14. Horvath, Michael, 2000. "Sectoral shocks and aggregate fluctuations," Journal of Monetary Economics, Elsevier, vol. 45(1), pages 69-106, February.
  15. Córdoba, Juan-Carlos, 2008. "On the distribution of city sizes," Journal of Urban Economics, Elsevier, vol. 63(1), pages 177-197, January.
  16. Xavier Gabaix, 1999. "Zipf'S Law For Cities: An Explanation," The Quarterly Journal of Economics, MIT Press, vol. 114(3), pages 739-767, August.
  17. Lucas, Robert E, Jr & Prescott, Edward C, 1971. "Investment Under Uncertainty," Econometrica, Econometric Society, vol. 39(5), pages 659-81, September.
  18. Xavier Gabaix & Yannis M. Ioannides, 2003. "The Evolution of City Size Distributions," Discussion Papers Series, Department of Economics, Tufts University 0310, Department of Economics, Tufts University.
  19. Duranton, Gilles, 2002. "City Size Distributions as a Consequence of the Growth Process," CEPR Discussion Papers 3577, C.E.P.R. Discussion Papers.
  20. Duncan Black & Vernon Henderson, 1999. "A Theory of Urban Growth," Journal of Political Economy, University of Chicago Press, vol. 107(2), pages 252-284, April.
  21. Hercovitz, Z. & Sampson, M., 1989. "Output Growth, The Real Wage, And Employment Fluctuations," RCER Working Papers 179, University of Rochester - Center for Economic Research (RCER).
  22. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
  23. Rosen, Kenneth T. & Resnick, Mitchel, 1980. "The size distribution of cities: An examination of the Pareto law and primacy," Journal of Urban Economics, Elsevier, vol. 8(2), pages 165-186, September.
  24. Blank, Aharon & Solomon, Sorin, 2000. "Power laws in cities population, financial markets and internet sites (scaling in systems with a variable number of components)," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 287(1), pages 279-288.
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