A Theory of Heterogeneous City Evolution with Heterogenous Agents

This paper develops a new unified theoretical general equilibrium model in which the interactions between heterogeneous workers and firms influence heterogeneous city evolutions. Given the heterogeneous worker–firm–city framework, I study in depth the possible heterogenous city evolutions and the resulting implications on the labor market, as well as on overall productivity. In particular, it is shown that the same exogenous shocks may lead to completely different results depending on the relative dominance of the two countervailing effects of congestion and agglomeration. In an open economy setting, it is also shown that such relative dominance may affect the trading partner and generate the comovement of city evolution in each country.