Berliant, Marcus and Watanabe, Hiroki (2011): Explaining the Size Distribution of Cities: X-treme Economies.
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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 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. 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: X-treme Economies|
|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|
|Depositing User:||Marcus Berliant|
|Date Deposited:||15. Nov 2011 21:26|
|Last Modified:||16. Feb 2013 03:51|
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