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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 general equilibrium theory of economic growth in an urban environment. In our theory, variation in the urban structure through the growth, birth, and death of cities is the margin that eliminates local increasing returns to yield constant returns to scale in the aggregate. We show that, consistent with the data, the theory produces a city size distribution that is well approximated by Zipf's Law, but that also displays the observed systematic under-representation of both very small and very large cities. Using our model, we show that the dispersion of city sizes is consistent with the dispersion of productivity shocks found in the data.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Minneapolis in its series Staff Report with number 381.

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Date of creation: 2006
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Handle: RePEc:fip:fedmsr:381

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Keywords: Urban economics;

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  1. Gilles Duranton, 2002. "City Size Distributions As A Consequence of the Growth Process," CEP Discussion Papers dp0550, Centre for Economic Performance, LSE.
  2. Kwok Tong Soo, 2004. "Zipfs Law for Cities: A Cross Country Investigation," CEP Discussion Papers dp0641, Centre for Economic Performance, LSE.
  3. Charles I. Jones, 1999. "Growth: With or Without Scale Effects?," American Economic Review, American Economic Association, vol. 89(2), pages 139-144, May.
  4. Chun-Chung Au & Vernon Henderson, 2002. "How Migration Restrictions Limit Agglomeration and Productivity in China," NBER Working Papers 8707, National Bureau of Economic Research, Inc.
  5. Y Ioannides & Henry Overman, 2000. "Zipfs Law for Cities: An Empirical Examination," CEP Discussion Papers dp0484, Centre for Economic Performance, LSE.
  6. Hercowitz, Zvi & Sampson, Michael, 1991. "Output Growth, the Real Wage, and Employment Fluctuations," American Economic Review, American Economic Association, vol. 81(5), pages 1215-37, December.
  7. Horvath, Michael, 2000. "Sectoral shocks and aggregate fluctuations," Journal of Monetary Economics, Elsevier, vol. 45(1), pages 69-106, February.
  8. Xavier Gabaix, 1999. "Zipf'S Law For Cities: An Explanation," The Quarterly Journal of Economics, MIT Press, vol. 114(3), pages 739-767, August.
  9. Córdoba, Juan-Carlos, 2008. "On the distribution of city sizes," Journal of Urban Economics, Elsevier, vol. 63(1), pages 177-197, January.
  10. Romer, Paul M, 1990. "Endogenous Technological Change," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages S71-102, October.
  11. Lucas, Robert E, Jr & Prescott, Edward C, 1971. "Investment Under Uncertainty," Econometrica, Econometric Society, vol. 39(5), pages 659-81, September.
  12. Gabaix, Xavier & Ioannides, Yannis M., 2004. "The evolution of city size distributions," Handbook of Regional and Urban Economics, in: J. V. Henderson & J. F. Thisse (ed.), Handbook of Regional and Urban Economics, edition 1, volume 4, chapter 53, pages 2341-2378 Elsevier.
  13. Wright, Mark, 2004. "Firm Size Dynamics in the Aggregate Economy," Santa Cruz Department of Economics, Working Paper Series qt4rs4202s, Department of Economics, UC Santa Cruz.
  14. 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.
  15. 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.
  16. Xavier Gabaix, 1999. "Zipf's Law and the Growth of Cities," American Economic Review, American Economic Association, vol. 89(2), pages 129-132, May.
  17. 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.
  18. Esteban Rossi-Hansberg & Mark L.J. Wright, 2005. "Urban Structure and Growth," NBER Working Papers 11262, National Bureau of Economic Research, Inc.
  19. 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.
  20. 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.
  21. Henderson, J V, 1974. "The Sizes and Types of Cities," American Economic Review, American Economic Association, vol. 64(4), pages 640-56, September.
  22. 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.
  23. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
  24. Jan Eeckhout, 2004. "Gibrat's Law for (All) Cities," American Economic Review, American Economic Association, vol. 94(5), pages 1429-1451, December.
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