URBAN DYNAMICS AND GROWTHAdvances in Urban Economics

Edited by

Roberta CapelloDept. of Management, Economics & Industrial Engineering

Politecnico di MilanoMilano, Italy

and

Peter NijkampDept. of Spatial Economics

Free UniversityAmsterdam, The Netherlands

2004

ELSEVIERAmsterdam - Boston - Heidelberg - London - New York - OxfordParis - San Diego - San Francisco - Singapore - Sydney - Tokyo

c

CONTENTS

List of Contributors v

Chapter 1 The Theoretical and Methodological Toolboxof Urban Economics: From and Towards Where? 1Roberta Capello and Peter Nijkamp

1.1. Pathways in regional science and urban economics 21.2. The role of urban economics in regional science 41.3. Advances in urban economics: recent theoretical and

methodological directions 61.3.1. Prefatory remarks 61.3.2. Tendencies in theory 61.3.3. Tendencies in models and methods 13

1.4. Urban economics and regional science transition 161.5. Hurdles to be crossed 191.6. Reasons and structure of the volume 20

References 24

PART 1 AGGLOMERATION

Chapter 2 Urban Scale Economies: Statics and Dynamics 31Philip McCann

2.1. Introduction 312.2. Cities, returns to scale and agglomeration 332.3. Cities, innovation and firm creation 372.4. Clusters, firm types and the nature of transactions 402.5. The empirics of cities 452.6. Conclusions 52

References 53

Chapter 3 Beyond Optimal City Size: Theory and EvidenceReconsidered 57Roberta Capello

3.1. Introduction 573.2. Optimal city size: an old and still unsolved issue 59

3.3. New paradigms for an old problem 623.3.1. The neoclassical and Christailerian city 623.3.2. The network city 66

3.4. Traditional empirical analyses: the aspatial city 703.5. Recent empirical analyses: city size and environmental aspects 743.6. Recent empirical analyses: the specialised

city in an urban system 773.7. Concluding remarks 81

References 82

Chapter 4 Spatial Externalities and the Urban Economy 87Erik T. Verhoef and Peter Nijkamp

4.1. Cities in perspective 884.2. Urban externalities 914.3. An overview of urban externalities studies 95

4.3.1. Theoretical studies 964.3.2. Towards empirical studies 98

4.4. A modelling framework for urban externalities: analysingfirst-best and second-best policies for multiple externalities 1004.4.1. The analytical model 1024.4.2. A numerical example: base-case equilibrium 1094.4.3. First-best regulation 1124.4.4. Second-best regulation 114

4.5. Conclusion 117References 118

Chapter 5 Uncertainty, Social Capital and CommunityGovernance: The City as a Milieu 121Roberto Camagni

5.1. Introduction: complexity and uncertainty 1225.2. Uncertainty and the concept of local milieu 1245.3. Relational capital as a crucial constituent of the local milieu 1295.4. The city as a milieu 134

5.4.1. The conditions for a comparison 1345.4.2. The economic role of the city and a taxonomy

of urban agglomeration advantages 1375.4.3. The theoretical relationships between the Milieu

and the City 1405.5. Towards a new urban governance: the tool

of strategic planning 1435.6. Conclusions 147

References 147

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PART 2 ACCESSIBILITY

Chapter 6 Land-use, Transportation and Urban Development 153Ken J. Button, Peter Nijkamp and Piet Rietveld

6.1. Introduction 1546.2. Linking land-use and transport 1556.3. The distant past - up to the mid-1980s 1586.4. Congestion and pricing of transportation infrastructure 1626.5. Investment in transportation infrastructure 1666.6. Transportation, information and land-use 1696.7. Transportation demand modeling 1726.8. Conclusions 174

References 174

Chapter 7 Transport Systems and Urban Equilibrium 181Ears Eundqvist

7.1. Introduction 1827.2. Equilibrium and optimum in urban systems analysis 1837.3. Transport systems and urban land use in simplified

urban geographies 1857.3.1. Symmetric continuous space: optimum and equilibrium 1857.3.2. Symmetric discrete space: optimum and equilibrium 190

7.4. Transport systems and urban land use in realistic urbangeographies 1977.4.1. Modular/iterative approaches: optimum and equilibrium 1977.4.2. Simultaneous/integrated approaches: optimum and

equilibrium 2027.5. Lessons 2067.6. Research directions 208

References 209

Chapter 8 Intra-metropolitan Agglomeration, InformationTechnology and Polycentric Urban Development 213Jungyul Sohn, Geoffrey J.D. Hewings andTschangho John Kim

8.1. Introduction 2138.2. Spatial clustering of economic activities 2168.3. Information technology and urban spatial structure 2208.4. Spatial simultaneous equation systems 2238.5. Regressions for attraction and spillover effects 2268.6. Study area: Seoul metropolitan region 231

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8.7. Intra-metropolitan agglomeration in Seoul 2338.8. IT impact and polycentric urban development in Seoul 2378.9. Conclusions 243

References 244

Chapter 9 Dual Earners, Urban Labour Markets andHousing Demand 249Jan Rouwendal and J. Willemijn Van Der Straaten

9.1. Introduction 2509.2. Locational choices of couples in the US 251

9.2.1. Summary Costa and Kahn 2519.2.2. Methodological issues 2549.2.3. Urban labour market 255

9.3. Location choices of couples in the Netherlands 2609.3.1. The data 2609.3.2. Regional division 2619.3.3. Results 2629.3.4. Conclusions and comparison 265

9.4. Further empirical analysis 2659.4.1. Urban wage premium 2659.4.2. Dual earners and urban wage premium 2689.4.3. Conclusions so far 2699.4.4. Dual earners and the housing market 270

9.5. Conclusions 280References 282

Chapter 10 Land Use Regulation and Its Impact on Welfare 285Stephen Sheppard

10.1. Introduction 28510.2. Evolution of the literature 288

10.2.1. Theoretical analysis of the efficiency of land useregulation 289

10.2.2. Other possible effects 29310.3. A 'canonical' model of land use control 29410.4. Extending the model: potentially beneficial land use

regulation 30210.5. Empirical studies of land use regulation 307

10.5.1. Data and empirical evidence 30810.5.2. Assessing the impact of land use regulation 31110.5.3. Distributional impacts 312

10.6. Conclusion 314References 315

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PART 3 SPATIAL INTERACTION, MIGRATIONAND COMMUTING

Chapter 11 Spatial Interaction Models: From the Gravityto the Neural Network Approach 319Manfred M. Fischer and Aura Reggiani

11.1. Introduction 31911.2. Context and analytical framework 320

11.2.1. The generic spatial interaction model of the gravity type 32211.2.2. Specification of the deterrence function 32411.2.3. Four different cases 324

11.3. The statistical equilibrium 32711.4. The choice-theoretic approach 33011.5. The neural network approach 334

11.5.1. The unconstrained case of neural spatial interactionmodelling 335

11.5.2. The class of singly constrained neural spatialinteraction models 336

11.5.3. The modelling process 33711.5.4. The network learning problem and parameter

estimation procedures 33811.6. Concluding remarks 342

References 343

Chapter 12 Commuting: The Contribution of Search Theory 347Jos van Ommeren

12.1. Introduction 34712.2. Search theory 350

12.2.1. The basic assumption 35012.2.2. The optimal strategy 35212.2.3. Moving behaviour 35512.2.4. The optimal reservation wage strategy 35512.2.5. Adaptions and extensions 36012.2.6. Marginal willingness to pay 36812.2.7. Geographical structure 370

12.3. The observed commuting costs distribution 37212.4. Conclusion 375

References 375

Chapter 13 Ethnic Concentration and Human Capital Formation 381Thomas de Graaff and Henri L.F. de Groot

13.1. Introduction 38213.2. A model of migration and human capital accumulation 385

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13.2.1. The economy 38713.2.2. Endogenous migration 391

13.3. Within-country homogeneous human capital 39313.4. Heterogeneous human capital and migration 396

13.4.1. Negative impact of the neighborhood 39913.4.2. Positive impact of the neighborhood 400

13.5. Conclusion 402Appendix A13. Comparative statics 403Appendix B13. Human capital accumulation when migration

costs do not depend on human capital 405References 407

PART 4 URBAN HIERARCHY

Chapter 14 Advanced Insights in Central Place Theory 413Shin-Kun Peng

14.1. Introduction 41414.2. Central place theory 41614.3. The existence of a monocentric configuration 42014.4. The emergence of urban system 42714.5. The rank-size distribution in an urban hierarchy 43214.6. Conclusions 438

References 438

Chapter 15 The City System Paradigm: New Frontiers 443Hesham M. Abdel-Rahman

15.1. Introduction 44415.2. The internal structure of the city 44815.3. Agglomeration economies and city systems 452

15.3.1. Equilibrium system of cities 45315.3.2. Institutional city formation mechanisms 454

15.4. Identical cities without trade 45615.4.1. Public good 45715.4.2. Marshallian externality 45915.4.3. Differentiated intermediate input 46115.4.4. Differentiated consumption good 465

15.5. Specialization and trade 46815.6. Specialization vs. diversification 471

15.6.1. Cross-product externality 47115.6.2. Transportation costs 47215.6.3. Economy of scope 47415.6.4. Product cycle 478

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15.7. Heterogeneous household and income disparities 47915.8. Efficient system of cities 48315.9. Conclusion 490

References 491

Chapter 16 The City Network Paradigm: Theory and EmpiricalEvidence 495Roberto Camagni and Roberta Capello

16.1. Introduction 49616.2. Cooperation networks among firms: the emerging economic

paradigm 49916.3. Cities as collective actors 50216.4. The structure of the urban system: from city hierarchy to

city networks 50416.4.1. The need for a new paradigm 50416.4.2. The three logics of spatial behaviour of the firm 50616.4.3. The structure of the urban system 50816.4.4. The city network paradigm 510

16.5. Do city networks really exist? An econometric experiment 51316.6. Do city networks really generate advantages for city partners?

Some empirical evidence 51716.6.1. A measurement of'network surplus' 51716.6.2. Preconditions for the exploitation of network surplus 521

16.7. Conclusions 525References 527

PART 5 URBAN COMPETITIVENESS

Chapter 17 Dynamic Urban Models: Agglomeration and Growth 533Marcus Berliant and Ping Wang

17.1. Introduction 53417.2. From Solow-Swan to Ramsey urban growth models 539

17.2.1. The aggregate production approach to urban growth 54017.2.2. The golden rule solution 54417.2.3. The optimal exogenous growth framework 545

17.3. From exogenous to endogenous urban growth models 54817.3.1. A basic one-sector endogenous urban growth model 54917.3.2. A modified one-sector model of endogenous

urban growth 55217.3.3. Housing dynamics and zoning 55717.3.4. Two-sector endogenous urban growth and stability 56217.3.5. Endogenous growth in a perfectly competitive economy

with a system of cities 568

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17.4. Urban growth models with an imperfectly competitive market 56917.4.1. The role of Marshallian externalities and imperfect

competition 56917.4.2. The non-Walrasian approach to agglomeration

and growth 57217.5. Avenues for future research 575

References 577

Chapter 18 New Economic Geography Explanations of Urbanand Regional Agglomeration 583Kieran P. Donaghy

18.1. Introduction 58318.2. Krugman's core-periphery model 586

18.2.1. Consumer behavior 58718.2.2. Producer behavior 58918.2.3. Transportation costs 59218.2.4. Normalizations and short-run equilibrium 593

18.3. Developments in the new economic geography 59518.4. Accomplishments and challenges 600

References 605

Chapter 19 Agglomeration and Knowledge Diffusion 609Johannes Brocker

19.1. Introduction 61019.2. A growth model with two regions 611

19.2.1. Firms 61119.2.2. Households 61319.2.3. Dynamic equilibrium 614

19.3. Dynamics: convergence and divergence 61819.3.1. Divergence 61919.3.2. Agglomeration 62219.3.3. Convergence 626

19.4. Efficiency 62719.5. Conclusion 631

References 632

Chapter 20 Innovation and the Growth of Cities 635Zoltan J. Acs

20.1. Introduction 63520.2. Heterogeneity vs. specialization 63620.3. Endogenous technical change 639

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20.4. Entrepreneurship and innovation 64520.5. Towards a "new model of regional economic development?" 652

References 655

Chapter 21 Cities and Business 659Roger R. Stough and Rajendra Kulkarni

21.1. Introduction 66021.2. The location of technology intensive business 66121.3. Changes in business context and operations 66621.4. Land use and business location patterns 670

21.4.1. Urban land use theory and use patterns 67021.4.2. Urban decentralization and business activity 67121.4.3. Edge cities and the structure of business activity 673

21.5. Entrepreneurship and enterprise development in cities 67521.5.1. Interest in enterprise development has been increasing 67521.5.2. Reasons for growth in enterprise development 67621.5.3. Enterprise development: approaches in cities 67921.5.4. General observations and conclusions: enterprise

development and cities 68221.6. Discussion, conclusions and policy implications 683

References 685

PART 6 URBAN POLICY

Chapter 22 Strengthening Municipal Fiscal Autonomy ThroughIntergovernmental Transfers 691Peter Friedrich, Joanna Gwiazda and Chang Woon Nam

22.1. Introduction 69122.2. Fiscal equalisation to protect municipalities by conditional grants 696

22.2.1. Some fiscal issues surrounding the principle of connection 69622.2.2. Conditional grants 700

22.3. Principle of parallelism to prevent fiscal autonomy throughunconditional grants 70722.3.1. Definition of the principle of parallelism 70722.3.2. Analysis of the principle of parallelism 711

22.4. Conclusions 723References 724

Chapter 23 Urban Quality of Life and Public Policy: A Survey 729Gordon Mulligan, John Carruthers and Meagan Cahill

23.1. Introduction 72923.2. Interurban scale 731

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23.2.1. City rankings 73123.2.2. Other hedonic issues 74023.2.3. Population and employment relocation 75023.2.4. Industrial and business location 75723.2.5. Local economic development and planning 762

23.3. Intraurban scale 76523.3.1. Deprivation 76523.3.2. Growth and planning 772

23.4. Concluding remarks 786References 787

Chapter 24 Policy Issues in the Urban South 803Manie Geyer

24A. Introduction 80424.2. The South in global terms 804

24.2.1. Changing global divisions of labour 80424.2.2. Policies that caused economic change 80724.2.3. The impact of foreign direct investment 80824.2.4. Mega cities of the South 810

24.3. Development frameworks of the past 81624.3.1. Neo-liberalism 81624.3.2. Criticism of the lagging South 818

24.4. Making markets work in the South 82024.4.1. Pillars in the Southern economic markets 82024.4.2. Building new market structures in the urban South 821

24.5. New markets and urban sustainability 82524.6. Conclusion 830

References 831

Chapter 25 Urban Policy in a Global Economy 837Ake E. Andersson, Lata Chatterjee and T.R. Lakshmanan

25.1. Globalization: underlying processes, urban consequences,and policy implications 83725.1.1. Evolution of globalization processes, urban patterns

and policy domains 83825.1.2. Contemporary global network corporations, demand for

variety and urban consequences 84325.1.3. Demand for variety 84725.1.4. Urban consequences 849

25.2. Emerging urban policy domains and strategies 85125.2.1. Increasing role for urban economic policy 85125.2.2. Emerging institutions and policy strategies 853

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25.2.3. Changing urban policy orientation and innovations 85425.3. The American entrepreneurial city: policies, institutions,

and new spatial order 85525.3.1. Phase 1: policies and strategies to attract mobile capital:

supply side 85625.3.2. Phase 2: a transitional phase towards entrepreneurial

strategies 85725.3.3. Phase 3: entrepreneurial policies to promote endogenous

growth in the urban area 85825.3.4. A new spatial order in the entrepreneurial city 860References 862

Index 865