Discussion Paper Details

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Title: Urban Accounting and Welfare

Author(s): Klaus Desmet and Esteban Rossi-Hansberg

Publication Date: December 2010

Keyword(s): Amenities, China, City Size, Counterfactuals, Efficiency, Frictions, System of Cities, United States and Welfare

Programme Area(s): International Trade and Regional Economics

Abstract: This paper proposes a simple theory of a system of cities that decomposes the determinants of the city size distribution into three main components: efficiency, amenities, and frictions. Higher efficiency and better amenities lead to larger cities, but also to greater frictions through congestion and other negative effects of agglomeration. Using data on MSAs in the United States, we parametrize the model and empirically estimate efficiency, amenities and frictions. Counterfactual exercises show that all three characteristics are important in that eliminating any of them leads to large population reallocations, though the welfare effects from these reallocations are small. Overall, we find that the gains from worker mobility across cities are modest. When allowing for externalities, we find an important city selection effect: eliminating differences in any of the city characteristics causes many cities to exit. We apply the same methodology to Chinese cities and find welfare effects that are many times larger than in the U.S.

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Bibliographic Reference

Desmet, K and Rossi-Hansberg, E. 2010. 'Urban Accounting and Welfare'. London, Centre for Economic Policy Research.