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Understanding Spatial Agglomeration: Increasing Returns, Land, and Transportation Costs

Author

Listed:
  • Hans R.A. Koster

    (Department of Spatial Economics, Vrije Universiteit Amsterdam, Amsterdam, Netherlands)

  • Jacques-François Thisse

    (Cent. Oper. Res. Econom. (CORE), UC Louvain, Louvain-la-Neuve, Belgium)

Abstract

Economic activities are concentrated on a small share of inhabitable land. In our view, this agglomeration is the outcome of a trade-off between increasing returns and transportation costs, which capitalizes into land rents. Our second baseline idea is that Tiebout-like sorting provides a general framework to handle a large array of problems in spatial economics. Cities have high housing prices because they are productive and offer high levels of amenities and public goods. Both production and amenity effects capitalize in the land rent at a particular location. Through the process of bidding for land, spatial sorting is the involuntary consequence of a myriad of individual decisions made by agents who pursue their own interests.

Suggested Citation

  • Hans R.A. Koster & Jacques-François Thisse, 2024. "Understanding Spatial Agglomeration: Increasing Returns, Land, and Transportation Costs," Annual Review of Economics, Annual Reviews, vol. 16(1), pages 55-78, August.
    • Handle: RePEc:anr:reveco:v:16:y:2024:p:55-78
    DOI: 10.1146/annurev-economics-020723-041113
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    Citations

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    Cited by:

    1. Gilles Duranton & Tomoya Mori, 2025. "How Masa Fujita shaped the present of spatial economics and how he will inspire its future," The Japanese Economic Review, Springer, vol. 76(4), pages 691-716, October.
    2. Qianqian Yang & Nobuaki Hamaguchi, 2025. "Revisiting Minimum Wage: From Labor Economics to Spatial Economics," Discussion Paper Series DP2025-08, Research Institute for Economics & Business Administration, Kobe University.
    3. Henderson, J. Vernon & Thisse, Jacques-François, 2024. "Urban and spatial economics after 50 years," Journal of Urban Economics, Elsevier, vol. 144(C).
    4. Schmutz-Bloch, Benoît & Sidibé, Modibo, 2024. "Matching, centrality and the urban network," Journal of Urban Economics, Elsevier, vol. 144(C).
    5. Zhong, Huiyong & Wang, Xiaobin, 2025. "Spatial mobility of China’s population in the digital economy," Journal of Asian Economics, Elsevier, vol. 99(C).
    6. Yu, Chenyang & Gu, Cong, 2025. "Trade openness, market integration and economic growth: Evidence from China," International Review of Financial Analysis, Elsevier, vol. 106(C).
    7. Andres Rodriguez-Pose, 2025. "Why size really doesn't matter: From megacity myths to place-sensitive prosperity," Papers in Evolutionary Economic Geography (PEEG) 2539, Utrecht University, Department of Human Geography and Spatial Planning, Group Economic Geography, revised Dec 2025.

    More about this item

    Keywords

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    JEL classification:

    • R20 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - General
    • R30 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - General
    • R10 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - General

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