Urban Accounting and Welfare

Why do people live in particular cities? We can list many reasons, but two are undoubtedly relevant. Agents can enjoy the city or be more productive there. A combination of life amenities and productivity levels determines the size of cities, but the positive effects of these characteristics are capped by the costs and frictions arising from congestion. Depending on city governance and the flexibility of markets, these costs and frictions can be more or less important. These city characteristics are in turn enhanced and amplified by the presence of urban externalities. Understanding the different forces that determine city sizes is crucial for answering a broad set of questions. What is the relative importance of these forces in determining the size distribution of cities? How much would we gain or lose if cities had similar amenities, technology levels, or frictions? How much reallocation would this cause? More generally, what are the welfare implications of the location of agents across cities? In this paper we provide a simple way of decomposing the characteristics that lead to the size distribution of cities into three main components: efficiency, amenities, and excessive frictions. We use a simple urban theory to calculate these components and to carry out a wide set of counterfactual exercises that provide answers to the questions we asked above. The theory consists of a multi-city model with monocentric cities that produce a single good. Workers decide how much to work and where to live. Efficiency is modeled as TFP, amenities as directly affecting preferences