Resource information
This paper develops a dynamic model that
explains the pattern of population and production allocation
in an economy with an urban location and a rural one.
Agglomeration economies make urban dwellers benefit from a
larger population living in the city and urban firms become
more productive when they operate in locations with a larger
labor force. However, congestion costs associated with a too
large population size limit the process of urban-rural
transformation. Firms in the urban location also benefit
from a public good that enhances their productivity. The
model predicts that in the competitive equilibrium the urban
location is inefficiently small because households fail to
internalize the agglomeration economies and the positive
effect of public goods in urban production.
