Agglomeration Economies, Division of Labor and the Urban Land-Rent Escalation: A General Equilibrium Analysis of Urbanization

Abstract

A general equilibrium model with increasing return to labor specialization and economies of transaction agglomeration is developed to address the residential land-rent escalation associated with the urbanization process, which is in turn endogenized as a result of the evolution of the division of labor. The interplay among the geographical pattern of transactions, trading efficiency and the network size of the division of labor plays a crucial role in our story of urbanization. We show that: as transaction conditions are improved, the equilibrium level of division of labor and individuals' specialization levels increase; the urban land-rent increases absolutely as well as relative to that in the rural area, the relative per capita lot size of residence in the urban and rural areas decreases; the diversity of occupations in the urban area and the population share of urban residents increase; and the productivity of all goods and per capital real income increase.

Keywords: Division of labor, Economies of transaction agglomeration, General equilibrium, Geographical pattern of transactions, Residential land-rents, Transaction costs, Urbanization

JEL Classification: O18, R11, R14, R33