Saturday, November 24

Trade and the structure of cities

Now this is a very interesting take on how cities develop and grow based upon the interplay between trade costs, commuting costs and communication costs. I quote:

Our starting point is that firms’ performances are affected by the level of housing and commuting costs, which we call “urban costs”. This occurs through the land rent they pay to occupy central urban locations, and through the higher wages they have to pay to their workers to compensate them for their longer commutes and/or higher land rents. Hence, high urban costs render firms less competitive on local and foreign markets alike. As a result, despite scale economies arising from urban agglomeration (Duranton and Puga [5]), increasing urban costs could shift employment from large monocentric cities either to their suburbs or to distant and smaller cities, where these costs are lower, at least once trade costs have sufficiently declined to permit largescale exports to distant markets. In other words, economic integration could well challenge the supremacy of large cities in favor of small cities. The main point we wish to stress in this paper is that the emergence of subcenters within cities is a powerful strategy for large cities to maintain their attractiveness.

They develop load of mathematical models, which I am seriously not going to review, if you wish, I can send the paper to you for you to mathematically masticate over, but the results are very interesting. And the final para:

Finally, our analysis also has an important policy implication. It is well known that quite a few American and European cities have lost employment and population for a few decades. This state of affair has led city managers to seek local policies that would prevent the decentralization of industrial activities toward small and/or remote places. However, most of them did fail. This paper suggests that urban decision-makers would have been better inspired to foster the development of SBDs, endowed with high-quality business-to-business services and consumption amenities that attract both firms and workers.

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