Revisiting the Economic Effects of Density in the Wake of the COVID-19 Pandemic

The containment measures spurred by the COVID-19 pandemic restrict economic and social interaction in physical space and, hence, erode the comparative advantages of big cities that arise from density. We provide an accessible summary of the various costs and benefits associated with density and discuss how a reduction in net returns to density affects the spatial distribution of economic activity within a dynamic spatial model. The main takeaways are twofold. First, the collective evidence developed over decades of research into the economic effects of density suggests that prior to the pandemic, the benefits associated with density exceeded the costs, at least for moderately large cities in developed countries. Second, a sustainable reduction of the ability to socially and professionally interact in cities can have a severe impact on how the relative costs and benefits of density play out in equilibrium, potentially leading to a major relocation of population from larger to smaller cities.