A Granular Spatial Model

61 Pages Posted: 29 Mar 2022

See all articles by Gabriel M. Ahlfeldt

Gabriel M. Ahlfeldt

London School of Economics & Political Science (LSE) - Department of Geography and Environment

Thilo Albers

Humboldt University of Berlin

Kristian Behrens

University of Quebec at Montreal (UQAM) - Department of Economics

Date Written: March 2022

Abstract

We develop a granular spatial model (GSM) which introduces indivisible workers and firms into the canonical quantitative urban model. Assortative matching between heterogeneous employers and employees leads to the formation of large granular firms, which generates realistic agglomeration patterns with many empty locations and a few extremely dense ones, even with flat location fundamentals. This feature makes the GSM particularly suitable for the study of multiple equilibria and the long-run effects of temporary spatial shocks such as natural disasters or place-based policies. As almost all firms are inframarginal in the GSM, especially the most productive ones in the most dense locations, place-based policies become `place-based lotteries': their expected payoff critically hinges on the probability to attract a few large firms. We illustrate these insights using as an example the spectacular recent rise of Chicago's Fulton Market district west of the Loop.

Keywords: granular spatial model, internal city structure, multiple equilibria, Place-Based Policies

JEL Classification: R38, R52, R58

Suggested Citation

Ahlfeldt, Gabriel M. and Albers, Thilo and Behrens, Kristian, A Granular Spatial Model (March 2022). CEPR Discussion Paper No. DP17126, Available at SSRN: https://ssrn.com/abstract=4069935

Gabriel M. Ahlfeldt (Contact Author)

London School of Economics & Political Science (LSE) - Department of Geography and Environment ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

HOME PAGE: http://personal.lse.ac.uk/ahlfeldg/

Thilo Albers

Humboldt University of Berlin ( email )

Unter den Linden 6
Berlin, AK Berlin 10099
Germany

Kristian Behrens

University of Quebec at Montreal (UQAM) - Department of Economics ( email )

P.O. Box 8888, Downtown Station
Montreal, Quebec H3C 3P8
Canada

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