Why Urban Giants

1
Why Urban Giants?
2
Central Place Theory

• Scale economies relative to per capita demand are
  the same for all products and services
• Shopping externalities are very important
• Economies of scale in trade increase the size of
  central cities
• Industrialization increases the size of central
  cities

3
Trade and Urban Giants

• With trade, imported goods are a large part of
  consumption. City size has little effect on the
  prices paid for goods or on wages. Reduces
  incentives for workers to concentrate in largest
  city. Krugman (1995) Krugman and Livas (1992)
  Protectionism generates larger central cities.

4
Ades Glaeser Model

• Two regions capital and hinterlands
• Costless migration between regions
• Wages decline as population increases
• Lump sum tax ti for each region i
• Probability of revolt is function of tax in
  capital city
• Re-election depends on taxes of median voter
  (assumed to be in the hinterland)

5
First Order Conditions

• Set tax in city such that the marginal cost of
  the tax (the increased probability of revolt)
  equals marginal revenue
• Set tax in hinterland such that the marginal cost
  of the tax (increased probability of losing
  election) equals marginal revenue

6
Implications

• As degree of democracy decreases, the marginal
  cost of taxation decreases in hinterlands. Taxes
  increase in hinterlands relative to city. The
  gap that emerges between taxes in hinterland and
  taxes in city leads to a larger central city.
• An increase in instability increases the marginal
  cost of taxation in the city. Taxes decrease in
  city relative to hinterlands and this leads to
  larger central city.

7
Testing The Theory

• Regression models with many different
  specifications
• Trade has negative effect on size of main city
• Politics matters. Dictatorships have bigger
  populations in main city
• Case Studies of Specific Cities
• Rome -- grain distributed to city residents
• Edo in Tokugawa Japan -- trade and instability