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Urban structure and growth

  • Esteban Rossi-Hansberg
  • Mark L. J. Wright

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 how the urban structure is the margin that eliminates local increasing returns to yield constant returns to scale in the aggregate, thereby implying a city size distribution that is well described by a power distribution with coefficient one: Zipf's Law. Under strong assumptions our theory produces Zipf's Law exactly. More generally, it produces the systematic deviations from Zipf's Law observed in the data, namely, the underrepresentation of small cities and the absence of very large ones. In these cases, the model identifies the standard deviation of industry productivity shocks as the key element determining dispersion in the city size distribution. We present evidence that the dispersion of city sizes is consistent with the dispersion of productivity shocks in the data.

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Paper provided by Federal Reserve Bank of Minneapolis in its series Discussion Paper / Institute for Empirical Macroeconomics with number 141.

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Date of creation: 2003
Date of revision:
Handle: RePEc:fip:fedmem:141
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  1. Kwok Tong Soo, 2004. "Zipf's law for cities: a cross country investigation," LSE Research Online Documents on Economics 19947, London School of Economics and Political Science, LSE Library.
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  5. Esteban Rossi-Hansberg & Mark L. J. Wright, 2006. "Urban structure and growth," Staff Report 381, Federal Reserve Bank of Minneapolis.
  6. Y Ioannides & Henry Overman, 2000. "Zipfs Law for Cities: An Empirical Examination," CEP Discussion Papers dp0484, Centre for Economic Performance, LSE.
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