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Survival of the Fittest in Cities: Urbanisation and Inequality

Authors


  • We thank Andrea Galeotti and three anonymous referees for very helpful comments. Donald Davis, Klaus Desmet, Gilles Duranton, Wen-Tai Hsu, Wilfried Koch, Muriel Meunier, Yasusada Murata, Volker Nocke, Issi Romem, Esteban Rossi-Hansberg, Takaaki Takahashi, Jacques Thisse and participants at various seminars and conferences provided valuable feedback. Behrens is the holder of the Canada Research Chair in Regional Impacts of Globalisation. Financial support from the CRC Program of the Social Sciences and Humanities Research Council (SSHRC) of Canada, as well as from the Standard Research Grants Program, is gratefully acknowledged. Behrens and Robert-Nicoud gratefully acknowledge financial support from FQRSC Québec (Grant NP-127178). Part of this study was written while Robert-Nicoud was visiting the IES at Princeton, which he thanks for its hospitality. We also thank the organisers of the 2nd HSE Summer School in Pushkin, Russia, where we completed the current version of the study, for their hospitality.

Abstract

We develop a framework that integrates natural advantage, agglomeration economies and firm selection to explain why large cities are both more productive and more unequal than small towns. Our model highlights complementarities among those factors and matches a number of key stylised facts about cities. A larger city size increases productivity via selection and higher urban productivity provides incentives for rural–urban migration. Tougher selection increases the returns to skills and earnings inequality in cities. We illustrate a multi-city version of the model numerically and explore the formation of new cities, the growth of existing cities and changes in income inequality.

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