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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 that the urban structure is the margin that eliminates local increasing returns to yield constant returns to scale in the aggregate, which is sufficient to deliver balanced growth. In a multi-sector economy with specific factors and productivity shocks, the same mechanism leads to a city size distribution that is well described by a power distribution with coefficient one: Zipf's Law. Under certain assumptions our theory produces Zipf's Law exactly. More generally, it produces the systematic deviations from Zipf's Law observed in the data, including the under-representation of small cities and the absence of very large ones. In general, the model identifies the standard deviation of industry productivity shocks as the key parameter determining dispersion in the city size distribution. We present evidence that the relationship between the dispersion of city sizes and the variance of productivity shocks is consistent with the data.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11262.

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Date of creation: Apr 2005
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Handle: RePEc:nbr:nberwo:11262

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  1. Esteban Rossi-Hansberg & Mark L. J. Wright, 2003. "Urban structure and growth," Discussion Paper / Institute for Empirical Macroeconomics 141, Federal Reserve Bank of Minneapolis.
  2. Jonathan Eaton & Zvi Eckstein, 1994. "Cities and Growth: Theory and Evidence from france and Japan," Boston University - Institute for Economic Development 36, Boston University, Institute for Economic Development.
  3. Xavier Gabaix, 1999. "Zipf'S Law For Cities: An Explanation," The Quarterly Journal of Economics, MIT Press, vol. 114(3), pages 739-767, August.
  4. Córdoba, Juan-Carlos, 2008. "On the distribution of city sizes," Journal of Urban Economics, Elsevier, vol. 63(1), pages 177-197, January.
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  8. Charles I. Jones, . "Growth: With or Without Scale Effects?," Working Papers 99001, Stanford University, Department of Economics.
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  14. 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.
  15. 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.
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  17. Henderson, J V, 1974. "The Sizes and Types of Cities," American Economic Review, American Economic Association, vol. 64(4), pages 640-56, September.
  18. Paul Romer, 1991. "Endogenous Technological Change," NBER Working Papers 3210, National Bureau of Economic Research, Inc.
  19. 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.
  20. Yannis Menelaos Ioannides & Henry G. Overman, 2003. "Zipf’s law for cities : an empirical examination," LSE Research Online Documents on Economics 583, London School of Economics and Political Science, LSE Library.
  21. 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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  23. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
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