NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

The Dynamics of City Formation

J. Vernon Henderson, Anthony Venables

NBER Working Paper No. 13769
Issued in February 2008
NBER Program(s):   EFG   PE

This paper examines city formation in a country whose urban population is growing steadily over time, with new cities required to accommodate this growth. In contrast to most of the literature there is immobility of housing and urban infrastructure, and investment in these assets is taken on the basis of forward-looking behavior. In the presence of these fixed assets cities form sequentially, without the population swings in existing cities that arise in current models, but with swings in house rents. Equilibrium city size, absent government, may be larger or smaller than is efficient, depending on how urban externalities vary with population. Efficient formation of cities with internalization of externalities involves local government intervention and borrowing to finance development. The paper explores the institutions required for successful local government intervention.

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Document Object Identifier (DOI): 10.3386/w13769

Published: Vernon Henderson & Anthony Venables, 2009. "Dynamics of city formation," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 12(2), pages 233-254, April.

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