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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 general equilibrium theory of economic growth in an urban environment. In our theory, variation in the urban structure through the growth, birth, and death of cities is the margin that eliminates local increasing returns to yield constant returns to scale in the aggregate. We show that, consistent with the data, the theory produces a city size distribution that is well approximated by Zipf's Law, but that also displays the observed systematic under-representation of both very small and very large cities. Using our model, we show that the dispersion of city sizes is consistent with the dispersion of productivity shocks found in the data.

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Paper provided by Federal Reserve Bank of Minneapolis in its series Staff Report with number 381.

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Date of creation: 2006
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Handle: RePEc:fip:fedmsr:381
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  1. Henry G. Overman & Yannis Ioannides, 2000. "Zipf's law for cities: an empirical examination," LSE Research Online Documents on Economics 20136, London School of Economics and Political Science, LSE Library.
  2. Xavier Gabaix & Yannis M. Ioannides, 2003. "The Evolution of City Size Distributions," Discussion Papers Series, Department of Economics, Tufts University 0310, Department of Economics, Tufts University.
  3. Jan Eeckhout, 2004. "Gibrat's Law for (All) Cities," American Economic Review, American Economic Association, vol. 94(5), pages 1429-1451, December.
  4. Henderson, J. Vernon, 2005. "Urbanization and Growth," Handbook of Economic Growth, in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 1, chapter 24, pages 1543-1591 Elsevier.
  5. Córdoba, Juan-Carlos, 2008. "On the distribution of city sizes," Journal of Urban Economics, Elsevier, vol. 63(1), pages 177-197, January.
  6. Romer, Paul M, 1990. "Endogenous Technological Change," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages S71-102, October.
  7. Hercowitz, Zvi & Sampson, Michael, 1991. "Output Growth, the Real Wage, and Employment Fluctuations," American Economic Review, American Economic Association, vol. 81(5), pages 1215-37, December.
  8. Rosen, Kenneth T. & Resnick, Mitchel, 1980. "The size distribution of cities: An examination of the Pareto law and primacy," Journal of Urban Economics, Elsevier, vol. 8(2), pages 165-186, September.
  9. Gilles Duranton, 2007. "Urban Evolutions: The Fast, the Slow, and the Still," American Economic Review, American Economic Association, vol. 97(1), pages 197-221, March.
  10. Jonathan Eaton & Zvi Eckstein, 1994. "Cities and Growth: Theory and Evidence from france and Japan," Boston University - Institute for Economic Development 36, Boston University, Institute for Economic Development.
  11. Kwok Tong Soo, 2004. "Zipfs Law for Cities: A Cross Country Investigation," CEP Discussion Papers dp0641, Centre for Economic Performance, LSE.
  12. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
  13. Gilles Duranton, 2002. "City size distributions as a consequence of the growth process," LSE Research Online Documents on Economics 20065, London School of Economics and Political Science, LSE Library.
  14. Duncan Black & Vernon Henderson, 1999. "A Theory of Urban Growth," Journal of Political Economy, University of Chicago Press, vol. 107(2), pages 252-284, April.
  15. J.V. Henderson, 1972. "The Sizes and Types of Cities," Working Papers 75, Queen's University, Department of Economics.
  16. Blank, Aharon & Solomon, Sorin, 2000. "Power laws in cities population, financial markets and internet sites (scaling in systems with a variable number of components)," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 287(1), pages 279-288.
  17. Au, Chun-Chung & Henderson, J. Vernon, 2006. "How migration restrictions limit agglomeration and productivity in China," Journal of Development Economics, Elsevier, vol. 80(2), pages 350-388, August.
  18. Mark L.J. Wright & Esteban Rossi-Hansberg, 2004. "Firm Size Dynamics in the Aggregate Economy," 2004 Meeting Papers 878, Society for Economic Dynamics.
  19. Mark Wright & Esteban Rossi-Hansberg, 2004. "Urban Structure and Growth," 2004 Meeting Papers 33, Society for Economic Dynamics.
  20. Xavier Gabaix, 1999. "Zipf'S Law For Cities: An Explanation," The Quarterly Journal of Economics, MIT Press, vol. 114(3), pages 739-767, August.
  21. Xavier Gabaix, 1999. "Zipf's Law and the Growth of Cities," American Economic Review, American Economic Association, vol. 89(2), pages 129-132, May.
  22. Lucas, Robert E, Jr & Prescott, Edward C, 1971. "Investment Under Uncertainty," Econometrica, Econometric Society, vol. 39(5), pages 659-81, September.
  23. Horvath, Michael, 2000. "Sectoral shocks and aggregate fluctuations," Journal of Monetary Economics, Elsevier, vol. 45(1), pages 69-106, February.
  24. Charles I. Jones, . "Growth: With or Without Scale Effects?," Working Papers 99001, Stanford University, Department of Economics.
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