Ownership Structure and Fiscal Externalities in a System of Cities

In this theoretical article, I develop a unified framework that encapsulates: (i) a system of heterogeneous cities, (ii) unspecified transportation costs, and (iii) different land ownership structures that generate different fiscal externalities. I classify these land ownership structures into two categories: egalitarian versus inegalitarian. I then provide a full characterization of the decentralized and centralized economies. In particular, I prove that a spatial equilibrium can be a potential game equilibrium and can be a Cournot–Nash equilibrium. I also derive new conditions for existence, uniqueness, stability, optimality, and numerical approximation (Uzawa algorithm). This permits to disentangle the role of land ownership structures and fiscal externalities in the formation of cities. This also permits to demonstrate that land ownership structure is detrimental in determining the characteristics of a spatial equilibrium. In an egalitarian society, a spatial equilibrium sustains the social allocation. In an inegalitarian society, a spatial equilibrium is always suboptimal. Notably, I find a large spatial misallocation and substantial welfare costs by simulating the new framework using a version of the Uzawa algorithm and with a standard calibration. More globally, this establishes a new prediction that across‐city inequalities have a link with global inefficiency.