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We provide an integrated treatment of the theoretical literature on urban land use inspired by the monocentric model, including extensions that deal with multiple endogenous business centers, various dimensions of heterogeneity, and durable housing. After presenting the theory and distilling its key empirical implications, we critically review the empirical literature on differences in prices and development across urban locations, patterns of location choices of heterogeneous households in cities, sprawl and residential decentralization, and employment decentralization.

This paper examines the effects of urbanization on development and growth. It begins with a labor market perspective and emphasizes the importance of agglomeration economies, both static and dynamic. It then argues that more productive jobs in cities do not exist in a void and underscores the importance of job and firm dynamics. In turn, these dynamics are shaped by the broader characteristics of urban systems. A number of conclusions are drawn. First, agglomeration effects are quantitatively important and pervasive. Second, the productive advantage of large cities is constantly eroded and must be sustained by new job creation and innovation. Third, this process of creative destruction in cities, which is fundamental for aggregate growth, is determined in part by the characteristics of urban systems and broader institutional features. The paper highlights important differences between developing countries and more advanced economies. A major challenge for developing countries is to reinforce the role of their urban systems as drivers of economic growth.

Why do cities grow in population, surface area, and income per person? Which cities grow faster and why? To these questions, the urban growth literature has offered a variety of answers. Within an integrated framework, this chapter reviews key theories with implications for urban growth. It then relates these theories to empirical evidence on the main drivers of city growth, drawn primarily from the United States and other developed countries. Consistent with the monocentric city model, fewer roads and restrictions on housing supply hinder urban growth. The fact that housing is durable also has important effects on the evolution of cities. In recent decades, cities with better amenities have grown faster. Agglomeration economies and human capital are also important drivers of city growth. Although more human capital, smaller firms, and a greater diversity in production foster urban growth, the exact channels through which those effects percolate are not clearly identified. Finally, shocks also determine the fate of cities. Structural changes affecting the broader economy have left a big footprint on the urban landscape. Small city-specific shocks also appear to matter, consistent with the recent wave of random growth models.

Large cities produce more output per capita than small cities. This may occur because more talented individuals sort into large cities, because large cities select more productive entrepreneurs and firms, or because of agglomeration economies. We develop a model of systemsof cities that combines all three elements and suggests interesting complementarities between them. The model can replicate stylised facts about sorting, agglomeration, and selection in cities. It can also generate Zipf’s law for cities. Finally, it provides a useful framework within which to reinterpret existing empirical evidence.

We estimate the effects of interstate highways on the level and composition of trade for us cities. Highways within cities have a large effect on the weight of city exports with an elasticity of approximately 0.5. There is no discernible effect of highways on the total value of exports. Consistent with this, we find that cities with more highways specialize in sectors producing heavy goods.

This paper employs a unique Italian data source to take a comprehensive approach to labor market pooling. It jointly considers many different aspects of the agglomeration labor market relationship, including turnover, learning, matching, and hold up. It also considers labor market pooling from the perspective of both workers and firms and across a range of industries. Overall, the paper finds some support for theories of labor market pooling, but the support is weak. Specifically, there is a general positive relationship of turnover to local population density, which is consistent with theories of agglomeration and uncertainty. There is also evidence of onthejob learning that is consistent with theories of labor pooling, labor poaching, and hold up. In addition, the paper provides evidence consistent with agglomeration improving job matches. However, the labor market pooling gains that we measure are small in magnitude and seem unlikely to account for a substantial share of the agglomeration benefits accruing to Italian worker and firms.

Firms are more productive, on average, in larger cities. Two main explanations have been offered: firm selection (larger cities toughen competition, allowing only the most productive to survive) and agglomeration economies (larger cities promote interactions that increase productivity), possibly reinforced by localized natural advantage. To distinguish between them, we nest a generalized version of a tractable firm selection model and a standard model of agglomeration. Stronger selection in larger cities left-truncates the productivity distribution, whereas stronger agglomeration right-shifts and dilates the distribution. Using this prediction, French establishment-level data, and a new quantile approach, we show that firm selection cannot explain spatial productivity differences. This result holds across sectors, city size thresholds, establishment samples, and area definitions.

We estimate the effects of interstate highways on the growth of U.S. cities between 1983 and 2003. We find that a 10% increase in a city’s initial stock of highways causes about a 1.5% increase in its employment over this 20 year period. To estimate a structural model of urban growth and transportation, we rely on an instrumental variables estimation that uses a 1947 plan of the interstate highway system, an 1898 map of railroads, and maps of the early explorations of the U.S. as instruments for 1983 highways.

This paper provides descriptive evidence about the distribution of wages and skills in denser and less dense employment areas in France. We confirm that on average, workers in denser areas are more skilled. There is also strong over-representation of workers with particularly high and low skills in denser areas. These features are consistent with patterns of migration including negative selection of migrants to less dense areas and positive selection towards denser areas. Nonetheless migration, even in the long-run, accounts for little of the skill differences between denser and less dense areas. Finally, we find marked differences across age groups and some suggestions that much of the skill differences across areas can be explained by differences between occupational groups rather than within.

Taxes levied on the sale or purchase of real estate are pervasive but little studied. By exploiting a natural experiment arising from Toronto’s imposition of a Land Transfer Tax (LTT) in early 2008, we estimate the impact of real estate transfer taxes on the market for single family homes. Our data show that Toronto’s 1.1% tax caused a 15% decline in the number of sales and a decline in housing prices about equal to the tax. Relative to an equivalent property tax, the associated welfare loss is substantial, about 1forevery8 in tax revenue. The magnitude of this welfare loss is comparable to those associated with better known interventions in the housing market. Unlike many possible tax reforms, eliminating existing LTTs in favour of revenue equivalent property taxes appears straightforward.

We investigate the effect of lane kilometers of roads on vehicle-kilometers traveled (VKT) in US cities. VKT increases proportionately to roadway lane kilometers for interstate highways and probably slightly less rapidly for other types of roads. The sources for this extra VKT are increases in driving by current residents, increases in commercial traffic, and migration. Increasing lane kilometers for one type of road diverts little traffic from other types of road. We find no evidence that the provision of public transportation affects VKT. We conclude that increased provision of roads or public transit is unlikely to relieve congestion. (JEL R41, R48)

We study the impact of local taxation on the location and growth of firms. Our empirical methodology pairs establishments across jurisdictional boundaries to estimate the impact of taxation. Our approach improves on existing work as it corrects for unobserved establishment heterogeneity, for unobserved time-varying site-specific effects and for the endogeneity of local taxation. Applied to data for English manufacturing establishments, we find that local taxation has a negative impact on employment growth but no effect on entry.

This study examines the case for cluster policy. This case is theoretically ambiguous and empirically very weak.

Measures of urban productivity are typically positively associated with city population. But is this relationship causal? We discuss the main sources of bias in the proper identification of agglomeration effects. We also assess a variety of solutions that have been proposed in the literature to deal with them.

This paper provides supportive evidence to the notion that the division of labour is limited by the extent of the (local) market. We first propose a theoretical model. Its main prediction is that scarce specialists occupations are over-represented in large cities. Using census data for French cities, we find strong empirical support for this prediction.

The development of clusters of economic activity is an important feature of industrial policy. Industry clusters have long fascinated economists and geographers alike, the most renowned being Silicon Valley which is seen by many as the blueprint for regional development, innovation, and growth. Several clusters have also developed across Europe, including SiliconFen in Cambridge and Minalogic in Grenoble, and in recent years cluster policies have become popular among policy makers as a useful tool for informing decisions on industrial, regional, and public policy. This book looks at the mechanisms at work behind cluster dynamics, the gains that can be expected from increased clustering, and the determinants of cluster policies. Focusing on France, it provides a theoretical and empirical study of clusters, their success and failures, and the policy lessons that can be applied to the wider international community. France is particularly interesting because there is a long tradition of strong government intervention regarding the location of economic activity, and cluster initiatives are relatively unified across the country. This book shows that, whilst gains from clusters do exist, some firms tend to cluster too much and that spatial agglomeration is only successful to a point, after which congestion effects can offset these gains. It questions the need and the feasibility of cluster policies aimed at interfering directly in the concentration process of firms, and thus looks beyond the general enthusiasm for clusters.

This paper reviews the evidence about the effects of urbanization and cities on productivity and economic growth in developing countries using a consistent theoretical framework. As in developed economies, there is strong evidence that cities in developing countries bolster productive efficiency. Regarding whether cities promote self-sustained growth, the evidence is suggestive but ultimately inconclusive. These findings imply that the traditional agenda of aiming to raise within-city efficiency should be continued. Furthermore, reducing the obstacles to the reallocation of factors across cities is also desirable.

Spatial wage disparities can result from spatial differences in the skill composition of the workforce, in non-human endowments, and in local interactions. To distinguish between these explanations, we estimate a model of wage determination across local labour markets using a very large panel of French workers. We control for worker characteristics, worker fixed effects, industry fixed effects, and the characteristics of the local labour market. Our findings suggest that individual skills account for a large fraction of existing spatial wage disparities with strong evidence of spatial sorting by skills. Interaction effects are mostly driven by the local density of employment. Not controlling for worker heterogeneity leads to very biased estimates of interaction effects. Endowments only appear to play a small role.

We use a point-pattern methodology to explore the detailed location patterns of U.K. manufacturing industries. In particular, we consider the location of entrants and exiters versus continuing establishments, domestic- versus foreign-owned, large versus small, and affiliated versus independent. We also examine colocalization between vertically-linked industries. Our analysis provides a set of new stylized facts and confirmation for others.

While transport costs have fallen, the empirical evidence also points at rising total trade costs. In a model of industry location with endogenous transaction costs that seeks to replicate features from the machinery industry, we show how and under which conditions a decline in transport costs can lead to an increase in the total cost of trade. The subtle relationship between (endogenous) transport costs and the sensitivity of trade to distance is also explored.

With the use of French and US data, new and systematic evidence is provided about the rapid location changes of industries across cities (the fast). Cities are also slowly moving up and down the urban hierarchy (the slow), while the size distribution of cities is skewed to the right and very stable (the still). The model proposed here reproduces these three features. Small, innovation-driven shocks lead to the churning of industries across cities. Then, cities slowly grow or decline following net gains or losses of industries. These changes occur within a stable distribution. The quantitative implications of the model are also explored. (JEL R12, R32)

This paper embeds the canonical model of endogenous growth with product proliferation developed by Romer [Romer, P.M., 1990. Endogenous technical change. Journal of Political Economy 98, S71–S102] into a simple urban framework. This yields a reduced form isomorphic to the popular statistical device developed by Simon [Simon, H., 1955. On a class of skew distribution functions. Biometrika 42, 425–440], which in turn can yield Zipf’s law for cities. The stochastic outcomes of purposeful innovation and local spillovers can thus serve as foundations for random growth models.

This paper uses a unique labour force survey to document workplace communication patterns in urban, suburban and rural areas. A number of interesting stylised facts are distilled relating to workplace communication: its intensity, within-firm communication, communication external to the firm and the media being used with a special focus on information technologies. The paper also investigates the complementarities across different media of communication and the evolution over time of workplace communication patterns. It is found that cities foster communication external to the firm and the use of telecommunications. By contrast, the hypothesis of a greater prevalence of face-to-face communication in cities does not receive much empirical validation. Also, complementarities across media do not lend much support to popular predictions about the forthcoming demise of cities following the replacement of face-to-face meetings by telecommunications.

When firms cluster in the same local labour market, they face a trade-off between the benefits of labour pooling (i.e., access to workers whose knowledge help reduce costs) and the costs of labour poaching (i.e., loss of some key workers to competition and a higher wage bill to retain the others). We explore this tradeoff in a duopoly game. Depending on market size, on the degree of horizontal differentiation between goods, and on worker heterogeneity in terms of knowledge transfer cost, we characterise the strategic choices of firms regarding locations, wages, poaching and prices. Our results show that co-location, although it is always efficient in our framework, is not in general the non-cooperative equilibrium outcome.

We consider the literature on urban systems and New Economic Geography to examine questions concerning agglomeration and how areas respond to shocks to the economic environment. We first propose a diagrammatic framework to compare the two approaches. We then use this framework to study a number of extensions and to consider several policy relevant issues.

To study the detailed location patterns of industries, and particularly the tendency for industries to cluster relative to overall manufacturing, we develop distance-based tests of localization. In contrast to previous studies, our approach allows us to assess the statistical significance of departures from randomness. In addition, we treat space as continuous instead of using an arbitrary collection of geographical units. This avoids problems relating to scale and borders. We apply these tests to an exhaustive U.K. data-set. For four-digit industries, we find that (i) 52% of them are localized at a 5% confidence level, (ii) localization mostly takes place at small scales below 50 km, (iii) the degree of localization is very skewed, and (iv) industries follow broad sectoral patterns with respect to localization. Depending on the industry, smaller establishments can be the main drivers of both localization and dispersion. Three-digit sectors show similar patterns of localization at small scales as well as a tendency to localize at medium scales.

Striking evidence is presented of a previously unremarked transformation of urban structure from mainly sectoral to mainly functional specialisation. We offer an explanation showing that this transformation is inextricably interrelated with changes in firms’ organisation. A greater variety of business services for headquarters and of sector-specific intermediates for production plants within a city reduces costs, while congestion increases with city size. A fall in the costs of remote management leads to a transformation of the equilibrium urban and industrial structure. Cities shift from specialising by sector—with integrated headquarters and plants—to specialising mainly by function—with headquarters and business services clustered in larger cities, and plants clustered in smaller cities.

To identify communication externalities in French cities, we exploit a unique survey recording workplace communication of individual workers. Our hypothesis is that in larger and/or more educated cities, workers should communicate more. In turn, more communication should have a positive effect on wages. By estimating both an earnings and a communication equation, we find evidence of communication externalities. In larger and more educated cities, workers communicate more and in turn this has a positive effect on their wages. Depending on the estimates, we find that 13 to 22% of the effects of a more educated and larger city on wages percolate through this channel.

This handbook chapter studies the theoretical micro-foundations of urban agglomeration economies. We distinguish three types of micro-foundations, based on sharing, matching, and learning mechanisms. For each of these three categories, we develop one or more core models in detail and discuss the literature in relation to those models. This allows us to give a precise characterisation of some of the main theoretical underpinnings of urban agglomeration economies, to discuss modelling issues that arise when working with these tools, and to compare different sources of agglomeration economies in terms of the aggregate urban outcomes they produce as well as in terms of their normative implications.

In this paper we apply earnings equations for U.K. regions over 1982–1997. We find evidence of rapid convergence across regions regarding the determinants of individual wages (i.e., regional fixed-effects, gender gaps, and returns to education and experience). In contrast, data on average regional earnings point to a worsening of U.K. regional inequalities and a rise in the North-South gap. Education accounts for most of the discrepancy between aggregate divergence and disaggregated convergence. First, London gained because its workforce became relatively more educated over the period. Second, returns to education increased nationwide, which favored the most educated regions (i.e., London). Third, returns to education were initially lower in London but they (partially) caught up with the rest of the country. Had returns to education and their distribution across U.K. regions remained stable over the period, the U.K. North-South divide would have decreased.

This paper develops microfoundations for the role that diversified cities play in fostering innovation. A simple model of process innovation is proposed, where firms learn about their ideal production process by making prototypes. We build around this a dynamic general-equilibrium model, and derive conditions under which diversified and specialized cities coexist. New products are developed in diversified cities, trying processes borrowed from different activities. On finding their ideal process, firms switch to mass production and relocate to specialized cities where production costs are lower. We find strong evidence of this pattern in establishment relocations across French employment areas 1993-96.

Why are some cities specialised and others diversified? What are the advantages and disadvantages of urban specialisation and diversity? To what extent do the structure of cities and the activities of firms and people in them change over time? How does the sectoral composition of cities influence their evolution? To answer these and related questions, we first distil some key stylised facts from the empirical literature on cities and the composition of their activities. We then turn to a review of different theories looking at such issues, and study the extent to which these theories contribute to the understanding of the empirical regularities.

Since cities are likely to play an even more predominant role in the global economy in the future than they do at present, it is important to understand how urban centers are created, grow, and function in the process of generating and distributing wealth. This integrated collection of essays exploring the economic theory of cities assembles work by a number of the world’s leading exponents in North America, the UK/Europe, and Japan. Topics investigated include cities and agglomeration, urban systems, urbanization and growth, and cities and factor markets. The perspectives the editors and contributors offer have strong connections with several branches of modern economics, including industrial organization, public economics, international trade, and endogenous growth and economic development.

The author attempts to provide a synthesis of the long-run evolution of cities by taking an economic perspective. He defends the idea that urban growth for preindustrial cities has been limited by the tyranny of distance. Then he argues that technological progress, by fostering mobility, has reinforced economies of agglomeration and thus allowed for larger cities. This has led to the development of industrial cities and the dominance of the tyranny of distance. Nowadays, however, technological progress in communications and telecommunications seems to be challenging the rationale for agglomeration in cities as more and more economic interactions can be realized at arm’s length. Increasing mobility may have turned into a threat for cities, hence the prediction about the demise of cities. Nonetheless, it is argued that the `tyranny of proximity’ may provide a strong glue to keep postindustrial cities together.

Public economics typically assumes that local public goods only affect the utility of consumers. We analyze the case of purely productive local public goods within standard growth models. Investment in the public good enhances productivity only in the jurisdiction where it takes place. Capital, as well as people, is perfectly mobile. After characterizing the first-best equilibrium, we show that its decentralization to fiscally independent jurisdictions is more demanding than with local public consumer goods. In particular, efficient decentralization cannot be obtained with competitive land developers providing the public good through a simple land capitalization scheme.

This paper proposes a simple model of pre-industrial urbanization. Agglomeration stems from increasing returns generated by the specialization of labor, whereas dispersion is provoked by the transport costs of the agricultural good. Considering the existence of some urban institutions (in particular guilds), the equilibrium size of cities is derived and it is efficient. Within this framework, the effects of urban domination (e.g., taxation of agriculture) and the emergence of primate cities are explored. Finally, the transition between early and modern urbanization is studied.