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