Urbanization, Productivity Differences and Spatial Frictions

35 Pages Posted: 25 Apr 2019

See all articles by Calin Arcalean

Calin Arcalean

ESADE Ramon Llull University - Department of Economics

Gerhard Glomm

Indiana University Bloomington - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Ioana C. Schiopu

ESADE Ramon Llull University - Department of Economics

Date Written: 2019

Abstract

We study decentralized and optimal urbanization in a simple multi-sector model of a rural-urban economy focusing on productivity differences and internal trade frictions. We show that even in the absence of the typical externalities studied in the literature, such as agglomeration, congestion or public goods, the decentralized city size can be either too large or too small relative to that chosen by a planner. In particular, optimal urbanization exceeds decentralized levels when productivity differences in location specific non-traded goods is small, a case typically arising in developed economies. In contrast, developing countries are likely to display overurbanization. A numerical exercise calibrated to Brazilian data suggests that the wedges can be quantitatively important. Urban biased policies - placing a higher weight on the welfare of city dwellers - are closer to optimal policies than decentralized allocations whenever productivity differences in non-traded sectors are either very small or very large. For intermediate productivity differences, the urban bias leads to larger cities even relative to decentralized policies.

Keywords: city size, productivity differences, multi-sector models, trade costs, welfare

JEL Classification: R120, R130, O180, J610

Suggested Citation

Arcalean, Calin and Glomm, Gerhard and Schiopu, Ioana C., Urbanization, Productivity Differences and Spatial Frictions (2019). CESifo Working Paper No. 7609. Available at SSRN: https://ssrn.com/abstract=3377706

Calin Arcalean (Contact Author)

ESADE Ramon Llull University - Department of Economics ( email )

Av. de Pedralbes, 60-62
Barcelona, 08034
Spain

Gerhard Glomm

Indiana University Bloomington - Department of Economics ( email )

Wylie Hall
Bloomington, IN 47405-6620
United States
812-855-7256 (Phone)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Ioana C. Schiopu

ESADE Ramon Llull University - Department of Economics ( email )

Av. de Pedralbes, 60-62
Barcelona, 08034
Spain

HOME PAGE: http://profesores.esade.edu/ioanaschiopu

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