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DEPARTMENT OF ECONOMICS WORKING PAPER 2005 Department of Economics Tufts University Medford, MA 02155 (617) 627 – 3560 http://ase.tufts.edu/econ
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URBAN GROWTHYannis M. Ioannides1Tufts UniversityYannis.Ioannides@tufts.eduandEsteban Rossi-HansbergStanford Universityerossi@stanford.eduFebruary 2005Forthcoming: The New Palgrave Dictionary of Economics, Second Edition1Ioannides acknowledges gracious support by the John D. and Catherine T. MacArthur Foundation.1
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Urban Growth Abstract Urban growth refers to the process of growth and decline of economic agglomerations. The pattern of concentration of economic activity, and its evolution, has been found to be an important determinant, and in some cases the result, of urbanization, the structure of cities, the organization of economic activity, and national economic growth. The size distribution of citiesis the result of the patterns of urbanization, which result in city growth and city creation. The evolution of the size distribution of cities is in turn closely linked to national economic growth. JEL codes: E0, O4, R0 Urban growth, the growth and decline of urban areas, as an economic phenomenon is inextricably linked with the process of urbanization. Urbanization itself has punctuatedeconomic development. The spatial distribution of economic activity, measured both in terms ofpopulation, output and income, is concentrated. The patterns of such concentrations and their relationship to measured economic and demographic variables constitute some of the most intriguing phenomena in urban economics. They have important implications for the economicrole and size distribution of cities, the efficiency of production in an economy, and overall economic growth. As Paul Bairoch’s magisterial work has established [ Bairoch (1988) ], increasingly concentrated population densities since the “dawn of history” have been closely linked with the development of agriculture and transportation. Yet as economies move from those of traditional societies to their modern stage the role of the urban sector changes from merely providing services to leading in innovation and serving as engines of growth. Measurement of urban growth rests on a definition of what is an urban area, which is not standard throughout the world and differs even within the same country depending upon thenature of local jurisdictions and how they might have changed over time (which is true even forthe US). Legal boundaries might not coincide with provision of the same set of services. Economic variables commonly use include population, area, employment, density or output measures, and occasionally several of them not all of which are consistently available for all countries. Commuting patterns and density measures may be used to define metropolitanstatistical areas in the US as economic entities, but major urban agglomerations may involve a multitude of definitions. The study of urban growth has proceeded in a number of different strands. One strand has emphasized historical aspects of urbanization. Massive population movements from rural to
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urban areas have fueled urban growth throughout the world. Yet, it is fair to say that economicshas yet to obtain a thorough understanding of the intricate relationships between demographic transition, agricultural development and the forces underlying the industrial revolution.Innovations were clearly facilitated by urban concentrations and associated technologicalimprovements. A related strand focuses on the physical structure of cities and how it may change as cities grow. It also focuses on how changes in commuting costs, as well as industrialcomposition of national output and other technological changes have affected the growth of cities. A second strand has focused on understanding the evolution of systems of cities. That is,how cities of different sizes interact, accommodate and share different functions as the economydevelops and what are the properties of the size distribution of urban areas for economies at different stages of development. Do properties of the system of cities and of its city sizedistribution persist while national population is growing? Finally, there is a literature thatstudies the link between urban growth and economic growth. What are the restrictions that urban growth imposes on economic growth? What economic functions are allocated to cities ofdifferent sizes in a growing economy? Of course, all of these strands are closely related and none of them may be fully understood, theoretically and empirically, completely on its own. In what follows we address each in turn. Urbanization and the size distribution of cities The concentration of population and economic activity in urban areas may increase eitherbecause agents migrate from rural to urban areas (urbanization) or because economies grow both in term of population and output, which results in urban as well as rural growth. Urban centers may not be sustained unless agricultural productivity has increased sufficiently to allowpeople to move away from the land and devote themselves to non-food producing activities. Such “symmetry-breaking” in the uniform distribution of economic activity is an important factor in understanding urban development [ Papageorgiou and Smith (1983) ]. Research on the process of urbanization spans the early modern era -with the case of Europe having been most thoroughly studied, De Vries (1984) to recent studies that have applied modern tools to study urbanization in East Asia [ Fujita et al. (2004) ]. The ‘New Economic Geography’ literature has emphasized how an economy can become “differentiated” into an industrialized core (urbansector) and an agricultural “periphery” [ Krugman (1991) ]. That is, urban concentration is beneficial because the population benefits from the greater variety of goods produced (forward
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linkages) and may be sustained because a larger population generates in turn greater demand for those goods (backward linkages). This process exploits the increasing returns to scale that characterizes goods production but does not always lead to concentration of economic activity. The range of different possibilities is explored extensively in Fujita, Krugman, and Venables (1999). The process of urban growth is closely related to the size distribution of cities. As urban population grows, will it be accommodated in a large number of small cities, a small number of large cities or in a variety of city sizes? While cities have performed different functions in the course of economic development, a puzzling fact persists for a wide cross-section of countries and different time periods. The size distribution of cities is Pareto-distributed, is “scale-free.”Gabaix (1999) established this relationship formally. He showed that if city growth is scaleindependent (the mean and variance of city growth rates do not depend on city size: Gibrat’s Law) and the growth process has a reflective barrier at some level arbitrarily close to zero, the invariant distribution of city sizes is a Pareto distribution with coefficient arbitrarily close to one, that is Zipf’s Law . Empirical evidence on the urban growth process as well as Zipf’s Law is surveyed by Gabaix and Ioannides (2004). These results imply that the size distribution of cities and the process of urban growth are closely related. Eeckhout (2004) extends the empirical investigation by examining in depth all urban places in the US and finds that the inclusion of the lower end of the sample leads to alognormal size distribution. Duranton (2004) refines the theory by means of a quality-laddermodel of economic growth that allows him to model growth and decline of cities as cities win orlose industries following technological innovations. Ultimately, the movements of cities up and down the hierarchy balance out so as to produce a stable skewed size distribution. This theory is sufficiently rich to accommodate subtle differences across countries (in particular the US and France) that constitute systematic differences from Zipf’s law. Rossi-Hansberg and Wright (2004) use a neoclassical growth model that is also consistent with observed systematicdeviations from Zipf’s law. In particular the fact that the actual size distribution of cities shows fewer smaller and larger cities than the Pareto distribution, and that the coefficient of the Pareto distribution has been found to be different than one although centered on it. They identify the standard deviation of the industry productivity shocks as the key factor behind these deviations
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from Zipf’s Law. The evident similarity of the conclusions of those two papers clearly suggests that the literature is closer than ever before to resolving the Zipf’s law “puzzle.” Urban growth and city structure Understanding urbanization and economic growth requires understanding the variety of factors that can affect city size and therefore its short term dynamics. All of them lead to the basic forces that generate the real and pecuniary externalities that are exploited by urban agglomeration, on one hand, and congestion, which follows from agglomeration, on the other. There are three basic types of agglomeration forces that have been used, in different varieties, to explain the existence of urban agglomerations; all of them were initially proposed in Marshall (1920): Knowledge spillovers, that is the more biomedical research there is in an urban area, the more productive a new research laboratory will be; thick markets for specialized inputs, the more firms that hire specialized programmers the larger the pool from which an additional firmcan hire when the other may be laying off workers; and backward and forward linkages. Local amenities and public goods can themselves be relevant agglomeration forces. The size of urban agglomerations is the result of a tradeoff between the relevant agglomeration and congestion forces. Urban growth can therefore be the result of any city- specific or economy-wide change that augments the strength or scope of agglomeration forces or reduces the importance of congestion forces. One example that has been widely used in the literature is a reduction in commuting costs that leads to larger cities both in terms of area, population, and in most models also output [ Chatterjee and Carlino (1999) ]. Another example is adoption of information and communication technologies that may increase the geographicscope of production externalities, therefore increasing the size of cities. Changes of underlying economic factors cause cities to grow or decline as they adjust to their new equilibrium sizes. Another more subtle effect is changes in the patterns of specialization that are associated with equilibrium city sizes. That is, coexistence of dirtyindustry with high tech industry will generate too much congestion, and therefore cities will specialize in one or the other industry. Adjustments in city sizes and patterns of specialization in turn may be slow since urban infrastructure, as well as business structures and housing, are durable and new construction takes time [ Glaeser and Gyourko (2004) ]. However, this type of
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changes lead only to transitional urban growth, as city growth or decline eventually dies out inthe absence of other city-specific or economy-wide shocks. Even when any of the economy wide variables, like population, grow continuously, the growth rate of a specific city will die out because of new city creation [ Ioannides (1994), Rossi-Hansberg and Wright (2004) ].A lot of attention has also been devoted to the effect that this type of urban growth has on urban structure. Lower commuting costs may eliminate the link between housing location choices and workplace location. This results in more concentration of business areas, increased productivity because of, say, knowledge spillovers and lower housing costs in the periphery of the city. Urban growth can therefore lead to suburbanization, as well as multiple business centers, as in Fujita and Ogawa (1992) or Lucas and Rossi-Hansberg (2002). Those phenomenabecoming increasingly important because of the decline in transport and commuting costs brought about by the automobile along with public infrastructure investments. In other words, urban growth is associated with sprawl [ Anas, Arnott, and Small (1998) ]. Urban and national economic growth Most economic activity occurs in cities. This fact links national and urban growth. An economy can grow only if cities, or the number of cities, grow. In fact, Jacobs (1969) and Lucas(1988) underscore knowledge spillovers at the city level as a main engine of growth. The growth literature has also argued that in order for an economy to exhibit permanent growth the aggregate technology has to be asymptotically constant returns to scale [ Jones (1999) ]. If not, the growth rate in an economy will either explode or converge to zero. How is this consistent with the presence of scale effects at the city level? Eaton and Eckstein (1997), motivated by empirical evidence on the French and Japanese urban systems, study the possibility of parallel city growth which is assumed to depend critically on intercity knowledge flows together with accumulation of partly city-specific human capital across a given number of cities. Rossi-Hansberg and Wright (2004) propose a theory where scale effects and congestion forces at the city level balance out in equilibrium to determine the size of cities. Thus, the economy exhibits constant returns to scale by the number of cities increasing along with the scale of the economy. Hence, economic growth is the result of urban growth in the size and the number of cities. Ifbalanced growth is the result of the interplay between urban scale effects and congestion costs,
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these theories have important implications for the size distribution of cities and the urbangrowth process. These implications turn out to be consistent with the empirical size distributionof cities, that is Zipf’s Law, and with observed systematic deviations from Zipf’s Law. Summarizing, urban growth affects the efficiency of production, economic growth, and the way agents interact and live in cities. Understanding its implications and causes has captured the interest of economists in the past and deserves to continue doing so in the future. Yannis M. Ioannides, Tufts University, and Esteban Rossi-Hansberg, Stanford University References: 1. Anas, A, R. Arnott, and K. Small, 1998, “Urban Spatial Structure,” Journal of Economic Literature, 36:1426-1464. 2. Bairoch, P., 1988, Cities and Economic Development, University of Chicago Press. 3. Chatterjee S. and G. Carlino, 1999, “Aggregate Metropolitan Employment Growth and the Deconcentration of Metropolitan Employment,” Working paper, Federal Reserve Bank of Philadelphia. 4. De Vries, Jan, 1984, European Urbanization: 1500-1800, Harvard University Press,Cambridge, MA. 5. Duranton G., 2004, “Urban Evolutions: the Still, the Fast, and the Slow,” Working paper, Department of Geography and Environment, London School of Economics. 6. Eaton, J. and Z. Eckstein, 1997, “Cities and Growth: Theory and Evidence from France and Japan,” Regional Science and Urban Economics, 27:443-474. 7. Eeckhout, J., 2004, “Gibrat's Law for (all) Cities.” American Economic Review, 94, 5, 1429-1451. 8. Fujita, M., P. Krugman, and A. Venables, 1999, The Spatial Economy: Cities, Regions, and International Trade, MIT Press.9. Fujita, M., T. Mori, J. V. Henderson, and Y. Kanemoto, 2004, “Spatial Distribution of Economic Activities in Japan and China,” in Henderson, J. V., and J.-F. Thisse, eds., Handbook of Regional and Urban Economics, Vol. 4, 2911-2977. 10. Fujita, M. and H. Ogawa, 1982, “Multiple Equilibria and Structural Transition of Nonmonocentric Urban Configurations,” Regional Science and Urban Economics, 12, 161-196. 11. Gabaix X., and Y. M. Ioannides, 2004, “The Evolution of City Size Distributions,” in Henderson J. V., and J.-F. Thisse, eds. Handbook of Regional and Urban Economics, North-Holland, Amsterdam, 2341-2378.
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12. Gabaix, X., 1999, “Zipf's Law for Cities: An Explanation,” Quarterly Journal of Economics, 114:739-767. 13. Glaeser E. L., and J. Gyourko, 2004, “Urban Decline and Durable Housing,” forthcoming in Journal of Political Economy. 14. Ioannides, Y. M., 1994, “Product Differentiation and Economic Growth in a System of Cities,” Regional Science and Urban Economics, 24: 461-484. 15. Jacobs, J., 1969, The Economy of Cities, Random House, New York. 16. Jones, C. I., 1999, “Growth: With and Without Scale Effects,” American Economic Review P&P, 89 (2): 139-144. 17. Krugman, P., 1991, “Increasing Returns and Economic Geography,” Journal of Political Economy, 99:483-499. 18. Lucas, R. E., Jr., 1988, “On the Mechanics of Economic Development,” Journal of Monetary Economics, 22(1): 3-42. 19. Lucas, R. and E. Rossi-Hansberg, 2002, “On the Internal Structure of Cities,”Econometrica, 70:1445-1476. 20. Marschall, A., 1920, Principles of Economics, London: Macmillan (8thed.). 21. Papageorgiou, Y. Y., and T. R. Smith, 1983, “Agglomeration as Local Instability of Spatially Uniform Steady-States,” Econometrica, 51: 1109-1119. 22. Rossi-Hansberg, E. and M. Wright, 2004, “Urban Structure and Growth,” Working paper, Department of Economics, Stanford University.
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WORKING PAPER SERIES 2005 http://ase.tufts.edu/econ/papers/papers.html2005-01EGGLESTON, Karen, Keqin RAO and Jian WANG; “From Plan to Market in the Health Sector? China's Experience.” 2005-02SHIMSHACK Jay; “Are Mercury Advisories Effective?Information, Education, and Fish Consumption.” 2005-03KIM, Henry and Jinill KIM; “Welfare Effects of Tax Policy in Open Economies: Stabilization and Cooperation.” 2005-04KIM, Henry, Jinill KIM and Robert KOLLMANN; “Applying Perturbation Methods to Incomplete Market Models with Exogenous Borrowing Constraints.” 2005-05KIM, Henry, Jinill KIM, Ernst SCHAUMBURG and Christopher A. SIMS; “Calculating and Using Second Order Accurate Solutions of Discrete Time Dynamic Equilibrium Models.”2005-06KIM, Henry, Soyoung KIM and Yunjong WANG; “International Capital Flows and Boom-Bust Cycles in the Asia Pacific Region.” 2005-07KIM, Henry, Soyoung KIM and Yunjong WANG; “Fear of Floating in East Asia.” 2005-08SCHMIDHEINY, Kurt; “How Fiscal Decentralization Flattens Progressive Taxes.” 2005-09SCHMIDHEINY, Kurt; “Segregation from Local Income Taxation When Households Differ in Both Preferences and Incomes.”
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2005-10DURLAUF, Steven N., Andros KOURTELLOS, and Chih Ming TAN; “How Robust Are the Linkages between Religiosity and Economic Growth?”2005-11KEELY, Louise C. and Chih Ming TAN; “Understanding Preferences For Income Redistribution.” 2005-12TAN, Chih Ming; “No One True Path: Uncovering the Interplay between Geography, Institutions, and Fractionalization in Economic Development.” 2005-13IOANNIDES, Yannis and Esteban ROSSI-HANSBERG; “Urban Growth.” 2005-14PATERSON, Robert W. and Jeffrey E. ZABEL; “The Effects of Critical Habitat Designation on Housing Supply: An Analysis of California Housing Construction Activity.” 2005-15KEELY, Louise C. and Chih Ming TAN; “Understanding Divergent Views on Redistribution Policy in the United States.” 2005-16DOWNES, Tom and Shane GREENSTEIN; “Understanding Why Universal Service Obligations May Be Unnecessary: The Private Development of Local Internet Access Markets.” 2005-17CALVO-ARMENGOL, Antoni and Yannis M. IOANNIDES;“Social Networks in Labor Markets.” 2005-18IOANNIDES, Yannis M.; “Random Graphs and Social Networks: An Economics Perspective.” 2005-19METCALF, Gilbert E.; “Tax Reform and Environmental Taxation.”2005-20DURLAUF, Steven N., Andros KOURTELLOS, and Chih Ming TAN; “Empirics of Growth and Development.” 2005-21IOANNIDES, Yannis M. and Adriaan R. SOETEVENT; “Social Networking and Individual Outcomes Beyond the Mean Field Case.”
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2005-22CHISHOLM, Darlene and George NORMAN; “When to Exit a Product: Evidence from the U.S. Motion-Pictures Exhibition Market.” 2005-23CHISHOLM, Darlene C., Margaret S. McMILLAN and George NORMAN; “Product Differentiation and Film Programming Choice: Do First-Run Movie Theatres Show the Same Films?”2005-24METCALF, Gilbert E. and Jongsang PARK; “A Comment on the Role of Prices for Excludable Public Goods.”