|
Why do cities form where they do? What are the driving forces behind the formation of cities? What roles do increasing returns, gains to trade and the location of marketplaces play? What role does the location of firms play? Is market failure necessary for agglomeration? Is perfect competition consistent with spatial modelling? Why do some cities grow faster than others? The answers to these questions have important policy implications, since the predictability of the effects of government actions rests on an understanding of the mechanisms driving the urban economy. In Discussion Paper No. 1270, Marcus Berliant and Yves Zenou answer some of these questions by explaining the formation of cities through labour specialization, gains to trade, a fixed cost for the transportation network, imperfect competition between firms and the commuting costs of consumers. In the setting, each firm can use only one type of labour and produce only one type of good. Depending on the number of firms and the types of workers, the model can take into account both general and specific human capital, which leads to a very large definition of labour specialization. Firms play a Nash location game among themselves, anticipating the locations of consumers, but taking prices as given. Within this framework, the paper characterizes the spatial configuration of firms in equilibrium. Whether or not equilibrium exists and whether or not it is locally unique depends crucially on the relative numbers of outputs, types of labour and firms. Lastly, both welfare theorems fail in this model. Labour Specialization and City Formation |