Journal Article

Urban Structure and Growth

Esteban Rossi-Hansberg and Mark L. J. Wright

in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 74, issue 2, pages 597-624
Published in print April 2007 | ISSN: 0034-6527
Published online April 2007 | e-ISSN: 1467-937X | DOI: http://dx.doi.org/10.1111/j.1467-937X.2007.00432.x
Urban Structure and Growth

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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 underrepresentation 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.

Keywords: R11; R12; R15

Journal Article.  13096 words.  Illustrated.

Subjects: Urban, Rural, and Regional Economics

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