The Dynamics of City Formation: Finance and Governance

Anthony Venables and J. Vernon Henderson

No 4638, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This Paper examines city formation in a country whose urban population is growing steadily over time, with new cities required to accommodate this growth. In contrast to most of the literature there is immobility of housing and urban infrastructure, and investment in these assets is taken on the basis of forward-looking behaviour. In the presence of these fixed assets cities form sequentially, without the population swings in existing cities that arise in current models. Equilibrium city size, absent government, may be larger or smaller than is efficient, depending on how urban externalities vary with population. Efficient formation of cities involves local government borrowing to finance development. The institutions governing land markets, leases, local taxation, and local borrowing and debt affect the efficiency of outcomes. The Paper explores the effects of different fiscal constraints, and shows that borrowing constraints lead cities to be larger than is efficient.

Keywords: Urbanization; City size; Urban developers; City governance (search for similar items in EconPapers)
JEL-codes: H70 O18 R10 R50 (search for similar items in EconPapers)
Date: 2004-09
New Economics Papers: this item is included in nep-geo and nep-ure
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Citations: View citations in EconPapers (10)

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Working Paper: The Dynamics of City Formation: Finance and Governance (2006)
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