DP12001 Who gets the urban surplus?

Author(s): Paul Collier, Anthony J Venables
Publication Date: April 2017
Keyword(s): cities, Land rent, productivity, sorting, wages
JEL(s): R1, R10, R2
Programme Areas: International Trade and Regional Economics
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=12001

High productivity in cities creates an economic surplus relative to other areas. How is this divided between workers and land-owners? Simple models with homogenous labour suggest that it accrues largely - or entirely - in the form of land-rents. This paper shows that heterogeneity of labour in two main dimensions (productivity differentials and housing demands) radically changes this result. Even a modest amount of heterogeneity can drive the land share of surplus down to 2/3rds or lower, as high productivity and/or low housing demand individuals receive large utility gains. In a system of cities the sorting of workers across cities mean that the land-rent share of surplus is lowest in the largest and most productive cities.