American Economic Review: Vol. 103 No. 6 (October 2013)


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Urban Accounting and Welfare

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Desmet, Klaus, and Esteban Rossi-Hansberg. 2013. "Urban Accounting and Welfare." American Economic Review, 103(6): 2296-2327.

DOI: 10.1257/aer.103.6.2296


We use a simple theory of a system of cities to decompose the determinants of the city size distribution into three main components: efficiency, amenities, and frictions. Higher efficiency and better amenities lead to larger cities but also to greater frictions through congestion and other negative effects of agglomeration. Using data on MSAs in the United States, we estimate these city characteristics. Eliminating variation in any of them leads to large population reallocations, but modest welfare effects. We apply the same methodology to Chinese cities and find welfare effects that are many times larger than those in the US.

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Desmet, Klaus (U Carlos III de Madrid)
Rossi-Hansberg, Esteban (Princeton U)

JEL Classifications

H71: State and Local Taxation, Subsidies, and Revenue
O18: Economic Development: Urban, Rural, Regional, and Transportation Analysis; Housing; Infrastructure
P25: Socialist Systems and Transitional Economies: Urban, Rural, and Regional Economics
R11: Regional Economic Activity: Growth, Development, Environmental Issues, and Changes
R23: Urban, Rural, Regional, Real Estate, and Transportation Economics: Regional Migration; Regional Labor Markets; Population; Neighborhood Characteristics
R41: Transportation: Demand, Supply, and Congestion; Safety and Accidents; Transportation Noise

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