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Survival of the Fittest in Cities: Agglomeration, Polarization, and Income Inequality

  • Kristian Behrens
  • Frédéric Robert-Nicoud

Using a large sample of US urban areas, we provide systematic evidence that mean household income rises with city ('agglomeration'), that this effect is stronger for the top of the income distribution ('polarization'), and that household income inequality increases at a decreasing rate in city size ('inequality'). To account simultaneously for these facts, we develop a microfounded model of endogenous city formation in which urban centres select the most productive agents. Income inequality is driven by both the 'poverty' and the 'superstar' margins: whereas the least productive agents fail in a tougher urban environment, which increases 'poverty', the most productive agents become 'superstars' who reap the benefits from a larger urban market. At equilibrium, the returns to skills are increasing in city size, thereby dilating the income distribution. Our model is both rich and tractable enough to allow for a detailed investigation of when cities emerge, what determines their size, how they interact through the channels of trade, and how inter-city trade influences intra-city income inequality.

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Paper provided by CIRPEE in its series Cahiers de recherche with number 0919.

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Date of creation: 2009
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Handle: RePEc:lvl:lacicr:0919
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  13. OTTAVIANO, Gianmarco & THISSE, Jacques-François, 1999. "Agglomeration and trade revisited," CORE Discussion Papers 1999041, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  14. Marcus Asplund & Volker Nocke, 2003. "Firm Turnover in Imperfectly Competitive Markets," PIER Working Paper Archive 03-010, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
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  19. Mark D. Partridge & Dan S. Rickman & Kamar Ali & M. Rose Olfert, 2009. "Do New Economic Geography agglomeration shadows underlie current population dynamics across the urban hierarchy?," Papers in Regional Science, Wiley Blackwell, vol. 88(2), pages 445-466, 06.
  20. Long, James E & Rasmussen, David W & Haworth, Charles T, 1977. "Income Inequality and City Size," The Review of Economics and Statistics, MIT Press, vol. 59(2), pages 244-46, May.
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  25. Kristian Behrens & Frédéric Robert-Nicoud, 2008. "Survival of the Fittest in Cities: Agglomeration, Selection, and Polarisation," CEP Discussion Papers dp0894, Centre for Economic Performance, LSE.
  26. Michaels, Guy & Rauch, Ferdinand & Redding, Stephen J., 2008. "Urbanization and Structural Transformation," CEPR Discussion Papers 7016, C.E.P.R. Discussion Papers.
  27. Baldwin, Richard E., 2001. "Core-periphery model with forward-looking expectations," Regional Science and Urban Economics, Elsevier, vol. 31(1), pages 21-49, February.
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  29. Rosenthal, Stuart S. & Strange, William C., 2004. "Evidence on the nature and sources of agglomeration economies," Handbook of Regional and Urban Economics, in: J. V. Henderson & J. F. Thisse (ed.), Handbook of Regional and Urban Economics, edition 1, volume 4, chapter 49, pages 2119-2171 Elsevier.
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  31. Bacolod, Marigee & Blum, Bernardo S. & Strange, William C., 2009. "Skills in the city," Journal of Urban Economics, Elsevier, vol. 65(2), pages 136-153, March.
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  33. Okubo, Toshihiro, 2009. "Trade liberalisation and agglomeration with firm heterogeneity: Forward and backward linkages," Regional Science and Urban Economics, Elsevier, vol. 39(5), pages 530-541, September.
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