The Dynamics of City Formation

53 Pages Posted: 8 Feb 2008 Last revised: 17 Aug 2010

See all articles by J. Vernon Henderson

J. Vernon Henderson

London School of Economics & Political Science (LSE); National Bureau of Economic Research (NBER)

Anthony J. Venables

University of Oxford; Centre for Economic Policy Research (CEPR)

Date Written: February 2008

Abstract

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.

Suggested Citation

Henderson, J. Vernon and Venables, Anthony J., The Dynamics of City Formation (February 2008). NBER Working Paper No. w13769. Available at SSRN: https://ssrn.com/abstract=1091404

J. Vernon Henderson (Contact Author)

London School of Economics & Political Science (LSE) ( email )

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National Bureau of Economic Research (NBER)

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Anthony J. Venables

University of Oxford ( email )

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Oxford, Oxfordshire OX1 4AU
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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