A threshold model of urban development

Abstract

AbstractWe propose a simple model of distribution of economic activity across cities of endogenous size and number determined by individual incentives. The individuals populating our model are endowed with idiosyncratic entrepreneurial creativity, the realization of which requires urban agglomeration linked to a crowding cost. Focusing on the dynamics of urban development, our predictions include a U-shaped relation between well-known measures of urbanization and urban primacy, a hypothesis that we test empirically using World Bank data. Our findings complement a growing consensus on U-shaped relations between level and concentration of economic activity across a broad set of applications.