The Economics of Cities: From Theory to Data
Economic activity is highly unevenly distributed within cities, as reflected in the concentration of economic functions in specific locations, such as finance in the Square Mile in London. The extent to which this concentration reflects natural advantages versus agglomeration forces is central to a range of public policy issues, including the impact of local taxation and transport infrastructure improvements. This paper reviews recent quantitative urban models, which incorporate both differences in natural advantages and agglomeration forces, and can be taken directly to observed data on cities. We show that these models can be used to estimate the strength of agglomeration forces and evaluate the impact of transportation infrastructure improvements on welfare and the spatial distribution of economic activity.
I am grateful to Princeton University for research support. Thanks to Nan Xiang for excellent research assistance. This paper was commissioned for the Journal of Economic Perspectives. I am very grateful to the editors, Gabriel Ahlfeldt, Treb Allen, Jason Barr, Dave Donaldson and Clifford Winston for helpful comments and suggestions. The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research.