DP10097 The Economics of Density: Evidence from the Berlin Wall

Author(s): Gabriel Ahlfeldt, Stephen J. Redding, Daniel M Sturm, Nikolaus Wolf
Publication Date: August 2014
Keyword(s): agglomeration, cities, commuting, density, gravity
JEL(s): N34, O18, R12
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=10097

This paper develops a quantitative model of internal city structure that features agglomeration and dispersion forces and an arbitrary number of heterogeneous city blocks. The model remains tractable and amenable to empirical analysis because of stochastic shocks to commuting decisions, which yield a gravity equation for commuting flows. To structurally estimate agglomeration and dispersion forces, we use data on thousands of city blocks in Berlin for 1936, 1986 and 2006 and exogenous variation from the city's division and reunification. We estimate substantial and highly localized production and residential externalities. We show that the model with the estimated agglomeration parameters can account both qualitatively and quantitatively for the observed changes in city structure.