Urban Accounting and Welfare

This paper proposes a simple theory of a system of cities that decomposes the determinants of the city size distribution into three main components: e¢ ciency, amenities, and frictions. Higher e¢ ciency and better amenities lead to larger cities, but also to greater frictions through congestion and other negative e¤ects of agglomeration. Using data on MSAs in the United States, we parameterize the model and empirically estimate e¢ ciency, amenities and frictions. Counterfactual exercises show that all three characteristics are important in that eliminating any of them leads to large population reallocations, though the welfare e¤ects from these re- allocations are small. Overall, we nd that the gains from worker mobility across cities are modest. When we introduce externalities, we nd an important city selection e¤ect: eliminat- ing di¤erences in any of the city characteristics causes many cities to exit. We apply the same methodology to Chinese cities and nd welfare e¤ects that are many times larger than those in the U.S.