Striking evidence is presented of a previously unremarked transformation of urban structure from mainly sectoral to mainly functional specialization. We offer an explanation showing that this transformation is inextricably interrelated with changes in firms' organization. A greater variety of business services for headquarters and of sector-specific intermediates for production plants within a city reduces costs, while congestion increases with city size. A fall in the costs of remote management leads to a transformation of the equilibrium urban and industrial structure. Cities shift from specializing by sector -- with integrated headquarters and plants -- to specializing mainly by function -- with headquarters and business services clustered in larger cities, and plants clustered in smaller cities.
Published:
Duranton, Gilles and Diego Puga. "From Sectoral To Functional Urban Specialisation," Journal of Urban Economics, 2005, v57(2,Mar), 343-370.
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