In an economy experiencing endogenous economic growth and exogenous population growth, we explore two main themes: how urbanization affects efficiency of the growth process and how growth affects patterns of urbanization. Localized information spillovers promote agglomeration and human capital accumulation fosters endogenous growth. Individual city sizes grow with local human capital accumulation and knowledge spillovers; and city numbers generally increase, which we demonstrate is consistent with empirical evidence. We analyze whether local governments can successfully internalize local dynamic externalities. In addition, we explore how growth involves real income differences across city types and how urbanization can foster income inequality. Most nonagricultural production in developed countries occurs in metropolitan areas. The underlying reasons why economic activity agglomerates into cities-localized information and knowledge spillover-also make cities the engines of economic growth in an We gratefully acknowledge support of the National Science Foundation (grants SBR 9422440 and SBR9730142) for this research. The work has benefited from conversations with Harl Ryder on the dynamics of the model and from comments by Gilles Duranton and participants in seminars at Brown, Colorado, and Texas, Austin

Abstract. In this paper, I examine the spatial correlation between wages and consumer purchasing power across U.S. counties to see whether regional demand linkages contribute to spatial agglomeration. First, I estimate a simple market-potential function, in which wages are associated with proximity to consumer markets. Second, I estimate an augmented market-potential function derived from the Krugman model of economic geography, parameter estimates for which reflect the importance of scale economies and transport costs. The estimation results suggest that demand linkages between regions are strong and growing over time, but quite limited in geographic scope. JEL Classification: F12, R12.

This paper develops micro-foundations for the role that diversified cities play in fostering innovation. A simple model of process innovation is proposed, where firms learn about their ideal production process by making prototypes. We build around this a dynamic general equilibrium model, and derive conditions under which diversified and specialised cities coexist in steady-state. New products are developed in diversified cities, trying processes borrowed from different activities. On finding their ideal process, firms switch to mass-production and relocate to specialised cities where production costs are lower. We find strong evidence of this pattern in establishment relocations across French employment areas 1993–1996.

Abstract There are two principal theories of why countries or regions trade: comparative advantage and increasing returns to scale. Yet there is virtually no empirical work that assesses the relative importance of these two theories in accounting for production structure and trade. We use a framework that nests an increasing returns model of economic geography featuring 'home market effects' with that of Heckscher-Ohlin. We employ these trade models to account for the structure of regional production in Japan. We find support for the existence of economic geography effects in eight of nineteen manufacturing sectors, including such important ones as transportation equipment, iron and steel, electrical machinery, and chemicals. Moreover, we find that these effects are economically very significant. The latter contrasts with the results of Davis and Weinstein (1996, Does economic geography matter for interactional specialiazation?, NEBRC 5706), which found scant economic significance of economic geography for the structure of OECD production. We conclude that while economic geography may explain little about the international structure of production, it is very important for understanding the regional structure of production.

Abstract Striking evidence is presented of a previously unremarked transformation of urban structure from mainly sectoral to mainly functional specialisation. We offer an explanation showing that this transformation is inextricably interrelated with changes in firms' organisation. A greater variety of business services for headquarters and of sector-specific intermediates for production plants within a city reduces costs, while congestion increases with city size. A fall in the costs of remote management leads to a transformation of the equilibrium urban and industrial structure. Cities shift from specialising by sector-with integrated headquarters and plants-to specialising mainly by function-with headquarters and business services clustered in larger cities, and plants clustered in smaller cities.  2004 Elsevier Inc. All rights reserved. JEL classification: R30; L23; R12

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This paper investigates the effects of air quality regulation in the USA on firm decisions concerning plant locations, births, sizes, and investment patterns, in major polluting industries. The intent of the Clean Air Act [CAA] and its Amendments from 1970 on is to induce/coerce plants to limit source emissions that lead to air pollution, so localities meet national air quality standards. In general, the national strategy is to have plants invest in “greener ” production equipment and to devote resources to containing and limiting emissions from day-to-day operations. While regulation has generally been very successful in curbing many forms of emissions, it has had other unintended and potentially costly impacts on firm decisions, which we explore in this paper. Unintended effects include relocation of polluting industries from more to less polluted areas, relative poliferation of small-scale enterprises in some industries altering industrial structure, and changes in investment patterns — the timing and phasing of investments. Unintended effects have occurred because the extent of regulatory activity varies intentionally across space, by plant size, and by firm size, as well as effectively over time. Thus regulatory effects are rather different than if regulatory activity were uniform across space,

This paper constructs a model of endogenous growth and endogenous industry location where the two interact. We show that with global spillovers in R&D, a high growth rate and a high level of transaction costs are associated with foreign direct investment to the South (the location with a low initial wealth). With local spillovers in R&D, this activity is agglomerated in the North and the rate of innovation increases with the concentration of Þrms in the North. This in turn implies that a decrease of transaction costs, through its impact on economic geography, will increase the growth rate. We show that industrial concentration can be beneÞcial for both regions if its impact on the rate of innovation is large enough to compensate the South for the loss of industry. This will be the case only for low enough transaction costs and high enough spillovers. ( 1999

Economic development and underdevelopment is one aspect of the uneven spatial distribution of economic activity. This paper reviews existing literature on geography and development, and argues that rigorous theoretical and empirical analysis is needed to increase understanding of the role of geography in development and to better design development policy. The analytical issues are: why does economic activity cluster in centers of activity? How do new centers develop? And what are the consequences of remoteness from existing centers? Empirical evidence comes both from the international context and from studies of internal economic geography and urbanization.

Does Winning a ‘Million Dollar Plant ’ Increase Welfare? Increasingly, local governments compete by offering substantial subsidies to industrial plants to locate within their jurisdictions. This paper uses a novel research design to estimate the local consequences of successfully bidding for an industrial plant, relative to bidding and losing, on labor earnings, public finances, and property values. Each issue of the corporate real estate journal Site Selection includes an article titled "The Million Dollar Plant " that reports the county where a large plant chose to locate (i.e., the 'winner'), as well as the one or two runner-up counties (i.e., the 'losers'). We use these revealed rankings of profit-maximizing firms to form a counterfactual for what would have happened in the winning counties in the absence of the plant opening. We find that the plant opening announcement is associated with a 1.5 % trend break in labor earnings in the new plant's industry in winning counties, as well as increased earnings in the same industry in counties that neighbor the winner. Further, there is modest evidence of increased expenditures for local services, such as public education. Property values may provide a summary measure of the net change in welfare, because the costs