This paper examines resource allocation in a system of cities with heterogeneous workers and firms and imperfect information. We derive an agglomeration economy in the labor market from a matching process between workers and firms, and show that it has the characteristics of a local public good. We illustrate two externalities associated with firm location, and show that they render free entry equilibria inefftcient. We analyze the formation of equilibrium cities as a game, and argue that since profit maximizing land developers cannot control the number of firms directly, they cannot attain efftcient city sizes. 1.

Acknowledgments: The inspiration for this paper was a conversation with John Kain in which he encouraged me to write a theoretical paper strengthening the microfoundations of the spatial mismatch hypothesis. An earlier version of this paper was presented at the 1996 TRED Conference on "Transportation and Land Use. " I am grateful to the participants and especially my discussant Vernon Henderson for helpful comments and criticisms. I would also like to thank Sanche Llewellyn and Michael Hansen, two Boston College Ph.D. students, whose term essays on the topic stimulated my thinking, Alexander Kalenik and An Yan for research assistance, seminar participants at Boston College for insightful comments, and the editor and two referees for helpful comments on an earlier draft. Sadly, I associate this paper with Bill Vickrey’s death since Bill died en route to the

ABSTRACT: This assessment of recent theoretical work on endogenous growth identifies three different engines of long-run growth: (i) the asymptotic average product of capital is positive; (ii) labor productivity increases as an external effect of capital accumulation; (iii) there are feedback effects on the cost of accumulating knowledge or innovating. A general model encompassing all three is considered, and then used to review different proposed determinants of long-run growth rates. The contribution of endogenous growth theory has been to create a framework in which to explain why economic institutions and policies can have long-run effects on growth rates.

Economic theories of systems of cities explain why production and consumption activities are concentrated in a number of urban areas of different sizes and industrial composition rather than uniformly distributed in space. These theories have been successively influenced by four paradigms: i) conventional urban economics emphasizing the tension between economies due to the spatial concentration of activity and diseconomies arising from that concentration; ii) the theory of industrial organization as it relates to inter-industry linkages and to product differentiation; iii) the New Economic Geography which ignores land markets but emphasizes trade among cities, fixed agricultural hinterlands and the endogenous emergence of geography; iv) the theory of endogenous economic growth. Among the issues examined are specialization versus diversification of cities in systems of cities, how city systems contribute to increasing returns in national and the global economies, the factors that determine skill distribution and income disparity between cities, the impacts of income disparity on welfare, whether population growth should cause economic activity to become more or less concentrated in urban areas, and how resources should be allocated efficiently in a system of cities. Related to the last issue we consider models where cities are organized by local planners or developers as well as cities that self organize by atomistic actions. A conclusion of the theoretical study of city systems is that markets fail in efficiently allocating resources across cities when certain intercity interactions are present and that a role for central planning may be necessary.

The economics of geographical indications (GIs) is assessed within a vertical product differentiation framework that is consistent with the competitive structure of agriculture. It is assumed that certi-fication costs are needed for GIs to serve as (collective) credible quality certification devices, and production of high-quality product is endogenously determined. We find that GIs can support a com-petitive provision of quality and lead to clear welfare gains, although they fall short of delivering the (constrained) first best. The main beneficiaries are consumers. Producers may also accrue some benefit if production of the high-quality products draws on scarce factors that they own. Key words: competitive industry, free entry/exit, geographical indications, Marshallian stability, qual-ity certification, trademarks, welfare. The market provision of quality is notoriously fraught with difficulties under asymmetric in-formation: when producers cannot credibly signal the quality of their products, consumers’ choices are predicated on the perceived aver-age quality on the market, and this pooling

This paper investigates positive and normative aspects of population distri-bution among cities when aggregate population is growing. On the positive level, the paper investigates how different allocation regimes, on the one hand, and different elasticities of substitution between housing and differentiated products, on the other, affect the characteristics of city-size distribution. On the norma-tive level, the paper investigates the potential sources of market failures and their policy implications. It is shown that the sources of market failures are rent-sharing externality, price markup, and multiple equilibria. Because of the latter, a straightforward elimination of the rent-sharing externality and the price markup may reduce welfare even below its achievable level under laissez-faire al-location. It depends on the stage of the aggregate population growth at the time when the policy is introduced (i.e., history matters). When the social planner is fully informed, a transfer scheme which induces the economy to convergence to the global optima can be designed.

This paper provides a survey and guide to the literature relevant to urban-ization and economic development. The paper starts with some basic facts and trends about urbanization worldwide. It then reviews the traditional two-sector urban-rural model, but focuses on the modern version, Krugman’s core-periphery model. However, two sector models do not capture the notion of an economy composed of many cities; nor do they represent modern agglomera-tion economies. Models and empirical evidence on agglomeration economies are reviewed. Then the paper turns to empirical evidence on the evolution of the size distribution of cities. It reviews the large literature on systems of cities models, focusing on an endogenous growth version. This part of paper concludes with a review of recent work integrating systems of cities models with the new economic geography. The final section reviews urbanization in China, focusing on policy issues such as migration, under-agglomeration and spatial biases in the FDI policy.

Abstract: Division of labor models have become a standard analytical tool, along with competitive general equilibrium models (Ricardian, HOS, Ricardo-Viner), in public finance, trade, growth, development, and macroeconomics. Yet unlike the earlier models, specialization models lack a canonical representation. This is because they are both new and complex, characterized by multiple equilibria, instability, and emergent structural properties under parameter transformation. We develop a general framework for such models, illustrating results from current research on specialization models, and explaining why one sub-class of these models is particularly difficult to illustrate easily. JEL classifications: [F12],[O12],[O41]

Urbanization occurs as countries switch sectoral composition away from agri-culture into industry and as technological advances in domestic agriculture release labor from agriculture to migrate to cities. Given this well accepted process, the study of urbanization focuses on three issues. For each of these, this paper will review key empirical facts and evidence and explain the key theoretical models used in analysis. The first issue concerns whether the urbanization process involving rural to urban migration within countries is reasonably efficient, or whether it is subject to forms of market failure or distortionary government policies. Part of the literature on the subject looks at the basic overall rural-urban divide to ask whether countries are over- or under-urbanized. That particular narrow question is not what the recent economics literature has focused on, for reasons we will see. Rather the literature has focused on the form that urbanization takes. In some writings, form means the development and then perhaps subsequent reversal of a core-periphery spatial, or regional structure. In other writings, it

This study discusses the reasons for market failure and its bias in an economy with two cities and two final goods: Tradeable differentiated products and non-tradeable housing. It is shown that inside the city, as in Dixit and Stiglitz (1977), diversity (number of firms) is too small. With regard to the population partition between the cities, the paper distinguishes between a marginal and a global market bias against agglomeration or dispersion (in a second-best context). The reasons for a marginal bias are twofold: A gap between marginal and average labor productivity and the (excessive) labor employed in housing production which vary between the large and the small cities. The source of the global bias is multiple stable equilibria. The marginal bias may be in an opposite direction to the global bias, such that more agglomeration may be marginally desirable, whereas full dispersion is (second-best) optimal. Simulations demonstrate that the same market structure and potential source of market failure may imply bias in different direction, depending on the aggregate population size.