Contents of Volume 4

CONTENTS OF VOLUME 4

Introduction to the Series

v

Contents of the Handbook

vii

Contents of Volume 4

xv

Foreword

xxvii

PART 1: CITIES AND URBAN SYSTEMS: FROM THEORY TO FACTS Chapter 48

Micro-foundations of Urban Agglomeration Economies

2063

GILLES DURANTON and DIEGO PUGA

1. Introduction 2. Sharing 2.1. Sharing indivisible goods and facilities 2.2. Sharing the gains from variety 2.3. Sharing the gains from individual specialisation 2.4. Sharing risk

3. Matching 3.1. Improving the quality of matches 3.2. Improving the chances of matching 3.3. Mitigating hold-up problems

4. Learning 4.1. Knowledge generation 4.2. Knowledge diffusion 4.3. Knowledge accumulation

5. Concluding comments References

2065 2067 2067 2069 2077 2081 2086 2086 2092 2096 2098 2099 2100 2106 2109 2111

Chapter 49

Evidence on the Nature and Sources of Agglomeration Economies

2119

STUART S. ROSENTHAL and WILLIAM C. STRANGE

1. Introduction 2. The scope of urban increasing returns

2121 2124 2124

2.1. Introduction xv

xvi

Contents of Volume 4 2.2. Strategies for evaluating the scope of agglomeration economies 2.3. Industrial scope 2.4. Geographic scope 2.5. Temporal scope 2.6. Industrial organization, "culture", and the transmission of agglomeration economies

3. The sources of urban increasing returns 3.1. Increasing returns or natural advantage? 3.2. What do the productivity studies have to say about microfoundations? 3.3. Individual microfoundations 3.4. The relative importance of Marshallian microfoundations

4. Case evidence 4.1. The New York Metropolitan Region Study 4.2. Regional Clusters of Innovation Project 4.3. Regional advantage

5. Conclusion References

2126

2132 2137 2139 2140

2144 2145 2146

2148

2158 2162 2163 2164 2165 2166 2167

Chapter 50

Neighborhood Effects

2173

STEVEN N. DURLAUF

1. Introduction 2. Theory 2.1. Choice within neighborhoods 2.2. Equilibrium neighborhood configurations 2.3. Neighborhoods and networks 2.4. Stratification and efficiency

3. Econometrics 3.1. Identification 3.2. Self-selection 3.3. Unobservables and sibling data

4. Empirical studies 4.1. Ethnography 4.2. Experiments 4.3. Econometric studies with observational data 4.4. Correlation studies and sibling data 4.5. Quasi-experiments 4.6. Aggregate studies 4.7. Identifying neighborhoods

5. Additional evidence on neighborhood effects 5.1. Classroom effects 5.2. Social capital 5.3. Segregation

2175 2179 2180 2190

2199 2202 2204 2205 2207 2209 2211 2211 2211 2212

2220 2220 2223 2224 2225 2225 2226 2228

Contents of Volume 4 5.4. Social attitudes 5.5. Home ownership and individual behavior 5.6. Geography and social customs

6. Conclusions Appendix: Selection correction for neighborhood effects regressions based on the multinomial logit model References

xvii

2229 2230 2231 2231 2233 2234

Chapter 51

Human Capital Externalities in Cities

2243

ENRICO MORETTI

1. Introduction 2. Recent trends in the geographic distribution of human capital across cities 3. Theories of social returns to education 3.1. Productivity spillovers 3.2. Crime 3.3. Voting

4. Estimating productivity spillovers in cities 4.1. Equilibrium with spillovers 4.2. Empirical models based on wages 4.3. Empirical models based on firm productivity

5. Empirical evidence on other social benefits of education: crime and voting 6. Conclusion References

2245 2247 2254 2256 2259 2259 2260 2261 2270 2281 2286 2288 2289

Chapter 52

Theories of Systems of Cities

2293

HESHAM M. ABDEL-RAHMAN and ALEX ANAS

1. Introduction 2. Internal structure of cities 3. Urban agglomeration and optimal city size 3.1. Local public good 3.2. Product variety and the home market effect 3.3. Labor productivity as an external economy 3.4. Discussion and notes on the literature

4. City formation mechanisms 4.1. Community planning: welfare maximization 4.2. City development 4.3. Self-organization by atomistic defection: are developers needed?

5. Key issues and a summary of historical developments in the literature 5.1. Key issues 5.2. Historical development of the field

2295 2298 2300 2301 2302 2304 2305 2306 2306 2308 2310 2312 2312 2315

Contents of Volume 4

xviii

6. Homogeneous labor 6.1. The simplest case: identical isolated cities 6.2. Specialization versus diversification 6.3. Increasing returns with traded varieties

7. Heterogeneous labor 8. Efficiency and the role of central planning in city systems 9. Growth 9.1. Exogenous population growth 9.2. Endogenous economic growth

10. Challenges ahead References

2317 2317 2318 2323

2324 2327 2330 2331 2332

2335 2336

Chapter53

The Evolution of City Size Distributions

2341

XAVIER GABAIX and YANNIS M. IOANNIDES

1. Introduction 2. Zipf's law for the upper tail of the city size distribution 2.1. 2.2. 2.3. 2.4.

Zipf's law: definitions Statistical methods to measure power law exponents A methodological note: "estimate, don't test" Empirical results on cities

3. Random growth and Zipf's law 3.1. 3.2. 3.3. 3.4.

From Gibrat's law to Zipf's law Deviations from Gibrat's law Economic models that deliver Gibrat's law Power laws at both ends of the city size distribution: random growth with exponential compounding

4. Economic explanations for Zipf's law other than Gibrat's law 4.1. Zipf's law for cities coming from a power law of natural advantages 4.2. Zipf's law for cities in models of self organization and endogenous city formation

2343 2344 2344 2345 2350 2350

2354 2354

2355 2359 2361

2361 2361 2362

5. Dynamics of the evolution of city size distributions

2364

5.1. Spatial concentration of economic activity in the U.S. 5.2. Urban evolution in the U.S.

2365 2366

6. The empirical evidence on the determinants of urban growth 6.1. Determinants of urban growth 6.2. The determinants of urban primacy 6.3. Studies of urban growth based on quasi "natural experiments"

7. Conclusion Appendix: Zipf's law and urban primacy References

2370 2370 2371 2371

2373 2374 2375

Contents of Volume 4

xix

PART 2: THE DESIGN OF LOCAL GOVERNMENTS AND POLICIES Chapter 54

Urban Political Economics

2381

ROBERT W. HELSLEY

1. Introduction 2. Objectives and local policy formation 2.1. Politics 2.2. Property values 2.3. Profits 2.4. Complex politics

3. Local political institutions 3.1. The institutions and their consequences 3.2. The common pool problem in city councils 3.3. Equilibrium models of distributive politics

4. Private government 4.1. Supplementary provision 4.2. Supplementary regulation 4.3. Potential competition 4.4. Gated communities

5. Conclusions References

2383 2384 2384 2388 2391 2396 2397 2398 2400 2403 2405 2406 2408 2409 2412 2415 2416

Chapter55

Fiscal Decentralization

2423

DENNIS EPPLE and THOMAS NECHYBA

1. Introduction 2. Increasing fiscal decentralization around the World 3. Theoretical literature on fiscal decentralization

2426 2427 2428

3.1. From clubs to local public goods: horizontal competition under local profit maximizing

behavior 3.2. Government competition under local Pigouvian welfare maximization: the role of inter-jurisdictional and intra-jurisdictional spillovers 3.3. Government competition under revenue maximizing governments: local governments as Leviathan rent seekers 3.4. Voting with feet and ballots: adding politics to Tiebout 3.5. Toward computational models forpolicy analysis: competing local governments with heterogeneous households

4. Adding a hierarchical dimension to decentralized government competition 4.1. Central or local provision: updating the "Decentralization Theorem" 4.2. Fiscalfederalism: hierarchical fiscal interactions between governments

5. Empirical research 5.1. Capitalization

2428

2433 2439 2441 2446 2452 2453 2457 2462 2462

XX

Contents of Volume 4

5.2. Jurisdictional fiscal inter-dependence, competition and efficiency 5.3. Politics, institutions and fiscal outcomes

2463 2465

5.4. Structural estimation of locational equilibrium models 5.5. Collective choice and local fiscal institutions 5.6. Stratification

2466 2468

6. Conclusions References

2469

2471 2471

Chapter56

Sprawl and Urban Growth

2481

EDWARD L. GLAESER and MATTHEW E. KAHN

1. Introduction 1.1. Plan of the paper

2483 2483

2. The extent of sprawl 3. The causes of sprawl 4. Evaluating the transportation cost hypothesis

2486 2492 2497

4.1. Transport costs over time 4.2. The empirical connection between cars and sprawl

2498 2500

5. Evaluating other causes of sprawl: the demand for land and flight from blight 2504 6. Evaluating other causes of sprawl: the political roots of sprawl 2506 7. Is sprawl bad? 2508 7.1. Housing prices and quantities 7.2. Congestion and cars 7.3. Sprawl and the environment

2509 2510

7.4. Agglomeration and productivity consequences of sprawl 7.5. Social consequences of sprawl 7.6. Zoning

2516 2517 2519

8. Conclusion Appendix: Proofs of propositions References

2512

2520 2521 2525

Chapter 57

Factor Mobility and Redistribution

2529

HELMUTH CREMER and PIERRE PESTIEAU

1. Introduction 2. The benchmark model and the "race to the bottom" result 2.1. Setting and closed economy solution 2.2. Small open economy 2.3. Strategic interaction: Nash equilibrium

3. Qualifications 3.1. National asymmetries 3.2. Objective function with varying population

2531 2533 2533 2534 2535

2537 2537 2538

Contents of Volume 4 3.3. Benevolent governments 3.4. Constant returns to scale 3.5. Full employment

4. Tax competition and tax cooperation 4.1. Tax competition and tax cooperation with two mobile factors 4.2. Partial tax cooperation 4.3. Centralization and/or coordination: further discussion

5. Intergenerational redistribution and tax competition 5.1. Capital mobility 5.2. Mobility of labor and capital

6. Conclusion References

xxi

2540 2541 2541 2543 2544 2547 2549 2552 2553 2555 2556 2558

PART 3: ECONOMIC GEOGRAPHY AND THE GEOGRAPHY OF MODERN ECONOMIES Chapter 58

Agglomeration and Economic Geography

2563

GIANMARCO OTTAVIANO and JACQUES-FRANCOIS THISSE

1. Introduction 2. The legacy of location theory 2.1. The location of a firm 2.2. The location of an industry 2.3. Where did we stand in 1990?

3. Where do firms locate: the home market effect 3.1. The market structure problem 3.2. The framework and two models

4. The core-periphery structure 4.1. The labor mobility framework 4.2. The vertical linkage framework

5. The bell-shaped curve of spatial development 5.1. More on spatial costs 5.2. Heterogenous workers

6. Where do we go from here References

2565 2569 2569 2571 2575 2576 2577 2578 2587 2587 2594 2598 2599 2601

2602 2604

Chapter 59

The Empirics of Agglomeration and Trade

2609

KEITH HEAD and THIERRY MAYER

1. Introduction 2. Defining, delimiting, and testing the NEG 2.1. Essential ingredients for NEG

2611 2612 2613

xxii

Contents of Volume 4 2.2. Alternative explanations of agglomeration 2.3. Testing NEG propositions

3. Preliminaries: defining and measuring market potential

2614 2615 2616

3.2. Profits as a function of market potential

2617 2620

4. Market potential raises factor prices

2621

3.1. Measuring access to markets

4.1. Market potential and international income inequality 4.2. Market potential and interregional wage differences

2622 2624

5. Market potential attracts factor inflows

2627

5.1. Firm locations and downstream demand 5.2. Worker locations and forward linkages

2627 2630

6. Home market/magnification effects 6.1. The magnification of production 6.2. The impact of "home biased" demand 6.3. The magnification of exports 6.4. The robustness of the relationship

7. Trade-induced agglomeration 7.1. Concentration regressions 7.2. Taking NEG theory seriously

2633

2633 2639 2641 2642 2644

2644 2649

8. Instability, persistence, and agglomeration

2658

8.1. Stability of historical location rankings 8.2. The long-term impact of temporary shocks

2659 2660

9. Conclusion Appendix: Data appendix of Figure 4 References

2662 2664 2665

Chapter60

Agglomeration and Regional Growth

2671

RICHARD E. BALDWIN and PHILIPPE MARTIN

1. Introduction 2. The basic framework of growth and agglomeration 3. The case without localized spillovers: growth matters for geography 3.1. The growth equilibrium 3.2. Perfect capital mobility: the location equilibrium 3.3. No capital mobility: "new growth" and "new geography" 3.4. Concluding remarks

4. The case with localized spillovers: geography matters for growth (and vice versa) 4.1. Necessary extensions of the basic model 4.2. The case of perfect knowledge capital mobility

2673 2675 2679

2679 2681 2684 2688 2689

2690 2691

Contents of Volume 4 4.3. The case without capital mobility: the possibility of a growth take-off and agglomeration 4.4. The geography of goods and ideas: stabilizing and destabilizing integration

5. Other contributions 6. Concluding remarks References

xxiii

2695 2700 2703 2706 2709

Chapter 61

Knowledge Spillovers and the Geography of Innovation

2713

DAVID B. AUDRETSCH and MARYANN P. FELDMAN

1. Introduction 2. The knowledge production function 3. Geography and the role of spillovers 4. Penetrating the black box of geographic space 5. Spillover mechanisms 6. Entrepreneurship as a spillover mechanism 7. Conclusions References

2715 2716 2717 2723 2726 2728 2734 2735

Chapter 62

Regional (Di)Convergence

2741

STEFANO MAGRINI

1. Introduction 2. The 'regression approach' 2.1. Theoretical foundations 2.2. Empirical implementation: cross-sectional method 2.3. Empirical implementation: panel data methods 2.4. Empirical implementation: time-series methods

3. Factor mobility and spatial interaction 3.1. Implications of interregional flows 3.2. Implications of spatial interaction effects

4. The distributional approach to convergence 4.1. General features of the distributional approach to convergence 4.2. Spatial interaction issues within the distributional approach

5. Conclusions Appendix A: NUTS regions Appendix B: Functional urban regions Appendix C: NUTS - per capita GDP (annual average) growth 1980-1995 Appendix D: FURs - per capita GDP (annual average) growth 1980-1995 References

2743 2744 2744 2746 2751 2752 2756 2757 2761 2765 2766 2771 2779 2781 2782 2783 2787 2791

xxiv

Contents of Volume 4

Chapter 63

Spatial Distribution of Economic Activities in North America

2797

THOMAS J. HOLMES and JOHN J. STEVENS

1. Introduction 2. Data 2.1. United States 2.2. Canada

3. Patterns of regional specialization 3.1. Broad sectors and broad regions 3.2. Narrow industries and more detailed geography 3.3. Regional specialization in manufacturing

4. Specialization by urbanization

2799 2801 2801 2807

2807 2807 2811 2815

2819

4.1. A measure of urbanization

2819

4.2. Specialization 4.3. Canadian data

2821 2826

5. Some facts about specialized industries 5.1. Across industry comparisons 5.2. Within industry comparisons

6. Understanding the location of industry

2828 2828 2830

2831

6.1. Natural advantage 6.2. Concentrated market factor

2831 2834

6.3. Government policy

2837

7. Conclusion Appendix A: Data sources

2839 2839

A. 1. Sources of the CBP data

2839

A.2. Mean employment by size class A.3. Economic Census data A.4. Canadian Business Patterns and Census data A.5. BEA data A.6. Other data

2840

References

2840 2840 2841 2841

2841

Chapter 64

The Spatial Distribution of Economic Activities in the European Union

2845

PIERRE-PHILIPPE COMBES and HENRY G. OVERMAN

Introduction 1. Data for studying the spatial distribution of economic activity in the European Union 2. Facts about the spatial distribution of economic activity in the European Union 2.1. Aggregate economic activity and the EU core-periphery pattern 2.2. Concentration and specialisation in the EU

2847 2848 2852 2852 2857

Contents of Volume 4 2.3. Comparing the EU and the U.S.: a role for micro-geographical data? 2.4. Where we stand

3. Explanations 3.1. A brief survey of location theory and its application to the EU 3.2. Industrial localisation in the EU 3.3. Labour productivity and wages inequalities 3.4. The dynamics of localisation in the EU

4. Conclusions References

XXV

2873 2878 2878 2879 2882 2890 2900 2904 2905

Chapter 65

Spatial Distribution of Economic Activities in Japan and China

2911

MASAHISA FUJITA, TOMOYA MORI, J. VERNON HENDERSON and YOSHITSUGU KANEMOTO

1. Introduction 2. Distribution of economic activities in Japan 2.1. City size distribution and regional transformations in postwar Japan 2.2. Urban agglomeration and city size 2.3. Spatial distribution of economic activities 2.4. Globalization in East Asia

3. Urbanization in China 3.1. Some key features of the urban system 3.2. A brief review of urbanization and urban policy in China since 1950 3.3. Some evidence on key issues

References

2913 2914 2914 2927 2934 2941 2951 2955 2961 2968 2974

PART 4: THE LONG-RUN VIEW ON CITIES AND GEOGRAPHY Chapter 66

Historical Perspectives on U.S. Economic Geography

2981

SUKKOO KIM and ROBERT A. MARGO

1. Introduction 2. U.S. regional development 2.1. Settlement of the U.S. continent 2.2. Economic integration and the rise of a national economy 2.3. Divergence and convergence of U.S. regional economies

3. U.S. urban development 3.1. Cities in the colonial period 3.2. Urbanization and industrialization 3.3. Urbanization in the twentieth century 3.4. Spatial structures of cities and metropolitan areas

2983 2983 2984 2985 2986 2994 2994 2997 2999 3001

xxvi

Contents of Volume 4

3.5. Size distribution of cities

3007

3.6. Urbanization and inventive activity 3.7. Urbanization and productivity

3009 3010

3.8. Urbanization and health 3.9. Immigration and urbanization

3011 3012

4. Conclusion References

3012 3014

Chapter 67

The Historical Geography of European Cities: An Interpretive Essay

3021

PAUL M. HOHENBERG

1. Introduction 2. A systems perspective 3. Pre-industrial spatial patterns 4. The early-modern period (1500-1800) 5. Proto-industrialization and towns 6. The early modern city: an appraisal 7. Cities and industrialization 8. Urban formations of the industrial age 9. Migration 1O.Metropolitan areas and their transformations in the industrial age 11 .Laggards and losers 12.Urban growth and urban systems in the industrial age 13.The first twentieth century 14.The second twentieth century 15.Urban growth and migration 16.Recent urban formations 17.Urban spatial structure in post-industrial Europe 18.Conclusion References

3023 3025 3030 3032 3034 3036 3036 3037 3040 3041 3042 3042 3043 3044 3047 3048 3049 3050 3051

Colour figures

3053

Author index

I- 1

Subject index

I-25