Berliant, Marcus and Watanabe, Hiroki (2009): Explaining the size distribution of cities: xtreme economies.

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Abstract
We criticize the theories used to explain the size distribution of cities. They take an empirical fact and work backward to obtain assumptions on primitives. The induced theoretical assumptions on consumer behavior, particularly about their inability to insure against the citylevel 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. We propose an alternative class of models, involving extreme risk against which consumers will not insure. Instead, they will move, generating a Fréchet distribution of city sizes that is empirically competitive with other models.
Item Type:  MPRA Paper 

Original Title:  Explaining the size distribution of cities: xtreme economies 
Language:  English 
Keywords:  Zipf's Law; Gibrat's Law; Size Distribution of Cities; Extreme Value Theory 
Subjects:  R  Urban, Rural, Regional, Real Estate, and Transportation Economics > R1  General Regional Economics > R12  Size and Spatial Distributions of Regional Economic Activity 
Item ID:  13671 
Depositing User:  Marcus Berliant 
Date Deposited:  28. Feb 2009 11:58 
Last Modified:  19. Feb 2013 18:53 
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URI:  http://mpra.ub.unimuenchen.de/id/eprint/13671 