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Explaining the size distribution of cities: x-treme economies

  • Berliant, Marcus
  • Watanabe, Hiroki

We criticize the theories used to explain the size distribution of cities. They take an empirical fact and work backward to obtain assumptions on primitives. The induced theoretical assumptions on consumer behavior, particularly about their inability to insure against the city-level productivity shocks in the model, are untenable. With either self insurance or insurance markets, and either an arbitrarily small cost of moving or the assumption that consumers do not perfectly observe the shocks to firms' technologies, the agents will never move. Even without these frictions, our analysis yields another equilibrium with insurance where consumers never move. Thus, insurance is a substitute for movement. We propose an alternative class of models, involving extreme risk against which consumers will not insure. Instead, they will move, generating a Fréchet distribution of city sizes that is empirically competitive with other models.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 13671.

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Date of creation: 27 Feb 2009
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Handle: RePEc:pra:mprapa:13671
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  1. Berliant, Marcus & Kung, Fan-chin, 2006. "Can Information Asymmetry Cause Agglomeration?," MPRA Paper 1278, University Library of Munich, Germany, revised 29 Dec 2006.
  2. Mark Wright & Esteban Rossi-Hansberg, 2004. "Urban Structure and Growth," 2004 Meeting Papers 33, Society for Economic Dynamics.
  3. Behrens, Kristian & Duranton, Gilles & Robert-Nicoud, Frédéric, 2010. "Productive cities: Sorting, selection and agglomeration," CEPR Discussion Papers 7922, C.E.P.R. Discussion Papers.
  4. 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.
  5. Berliant, Marcus & Kung, Fan-chin, 2010. "Can Information Asymmetry Cause Stratification?," MPRA Paper 21395, University Library of Munich, Germany.
  6. Xavier Gabaix, 2005. "The Granular Origins of Aggregate Fluctuations," 2005 Meeting Papers 470, Society for Economic Dynamics.
  7. M. Goldstein & S. Morris & G. Yen, 2004. "Problems with fitting to the power-law distribution," The European Physical Journal B - Condensed Matter and Complex Systems, Springer, vol. 41(2), pages 255-258, 09.
  8. Jan Eeckhout, 2004. "Gibrat's Law for (All) Cities," American Economic Review, American Economic Association, vol. 94(5), pages 1429-1451, December.
  9. Gabaix, Xavier & Ioannides, Yannis M., 2004. "The evolution of city size distributions," 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 53, pages 2341-2378 Elsevier.
  10. Xavier Gabaix, 1999. "Zipf'S Law For Cities: An Explanation," The Quarterly Journal of Economics, MIT Press, vol. 114(3), pages 739-767, August.
  11. Fujita, Masahisa & Mori, Tomoya, 1997. "Structural stability and evolution of urban systems," Regional Science and Urban Economics, Elsevier, vol. 27(4-5), pages 399-442, August.
  12. Jonathan Eaton & Samuel Kortum, 2002. "Technology, Geography, and Trade," Econometrica, Econometric Society, vol. 70(5), pages 1741-1779, September.
  13. Jan Eeckhout, 2009. "Gibrat's Law for (All) Cities: Reply," American Economic Review, American Economic Association, vol. 99(4), pages 1676-83, September.
  14. Xavier Gabaix, 1999. "Zipf's Law and the Growth of Cities," American Economic Review, American Economic Association, vol. 89(2), pages 129-132, May.
  15. Starrett, David, 1978. "Market allocations of location choice in a model with free mobility," Journal of Economic Theory, Elsevier, vol. 17(1), pages 21-37, February.
  16. Duranton, Gilles, 2006. "Some foundations for Zipf's law: Product proliferation and local spillovers," Regional Science and Urban Economics, Elsevier, vol. 36(4), pages 542-563, July.
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