Explaining the Size Distribution of Cities: X-treme Economies

Marcus Berliant () and Hiroki Watanabe

MPRA Paper from University Library of Munich, Germany

Abstract: The methodology used by theories to explain the size distribution of cities takes an empirical fact and works backward to first obtain a reduced form of a model, then pushes this reduced form back to assumptions on primitives. The induced assumptions on consumer behavior, particularly about their inability to insure against the city-level productivity shocks in the model, are untenable. With either self insurance or insurance markets, and either an arbitrarily small cost of moving or the assumption that consumers do not perfectly observe the shocks to firms' technologies, the agents will never move. Even without these frictions, our analysis yields another equilibrium with insurance where consumers never move. Thus, insurance is a substitute for movement. Even aggregate shocks are insufficent to generate consumer movement, since consumers can borrow and save. We propose an alternative class of models, involving extreme risk against which consumers will not insure. Instead, they will move.

Keywords: Zipf's Law; Gibrat's Law; Size Distribution of Cities; Extreme Value Theory (search for similar items in EconPapers)
JEL-codes: R12 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-geo and nep-ure
Date: Written
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http://mpra.ub.uni-muenchen.de/7090/

Related works:
Working Paper: Explaining the size distribution of cities: x-treme economies (2008)
Working Paper: Explaining the size distribution of cities: x-treme economies (2008)
Working Paper: Explaining the size distribution of cities: x-treme economies (2009)
Working Paper: Explaining the size distribution of cities: x-treme economies (2009)
Working Paper: Explaining the size distribution of cities: x-treme economies (2009)
Working Paper: Explaining the size distribution of cities: X-treme economies (2007)
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