Urban 01 Monocentric-4up PDF

Distribution of land across uses in Paris
Accesibility and land use in a city:

The monocentric city model
Multi-family residential
Single-family residential
Commercial
Transport
Open space
Source: Duranton and Puga (2015)

Urban Economics. Diego Puga
100%
Land use is of fundamental importance:

At the heart of large allocation decisions by firms and households (about
one-quarter of household expenditures).
Potentially touches on everything since everything has to be somewhere.
Commercial
Share of builtup land by use
Share of land by use
Urban land use and accessibility
100%
Open space
Transport
75%
50%
Builtup
25%
75%
Accessibility is also important:

Households engage in a variety of activities that take place in different
locations and must travel between them (taking between 5 and 10% of awake
time).
50%
Singlefamily
residential
25%
Urban land use and accessibility are intimately connected:

Other things equal, locations with better accessibility will be more desirable.
As a result, floorspace in these locations will fetch a higher price.
Multifamily residential
0%
30
20
10
10
20
Distance to Notre Dame (km.)
30
0%
30
20
10
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10
20
30
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The monocentric model
Population and preferences
General models of accessibility are hard because the location choice of

everyone (households and firms) depends on that of everybody else.
The monocentric model simplifies the problem
by imposing an exogenous location of jobs (at the centre),
and by reducing the travel problem to commutes.
Main tool to study the articulation between accesibility, land use, and city
population.
Derives from a framework developed by Alonso (1964) where individuals consume
land directly.
Enriched by Mills (1967) and Muth (1969) who explicitly modelled housing.
Reasonable first-order description of cities.
Models key disadvantages of bigger cities (more expensive housing, longer
commutes).
The development of this model marks the establishment of urban economics as
a separate field of research.
It has been extended in multiple ways and is the main basis for the analysis of
location within a city.
It helps structure important empirical contributions.
All residents in the city are identical in income and preferences (for now).
Utility function for housing h and a composite good z (numraire): u(h, z),
increasing in both arguments and strictly quasi-concave.
Free mobility within the city: common utility u.
City population may be fixed or endogenous (in the latter case, with free
mobility, also common utility across cities).
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The city
The Marshallian approach
Consider a linear monocentric city.

Land covered by the city can be represented by a segment on the positive
real line (length endogenously determined).
Production and consumption of a numeraire good take place at a single point
x = 0, the Central Business District (cbd).
Wage w in the cbd.
Residents choose their location between 0 and the city fringe x.
Landlords allocate housing at each location to its highest bidder.
Commuting cost for resident in x: x.
Budget constraint: w x = P (x) h(x) + z(x).
There are several ways to solve this model.

The Marshallian approach:
Solves the individual budget allocation between housing and the numraire at
each location.
Then obtains house prices by ensuring that, with each consumer allocating
her income optimally, utility is equalised across locations.
Then returns to the consumer problem to obtain quantities.
The consumer problem is a standard consumer maximisation problem with two

twists:
residents must choose a location, and
the price of housing at each location must be computed as part of the
equilibrium.
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The Marshallian approach makes clear prices are endogenous but is convoluted.
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The Marshallian approach
Given locations, utility maximisation implies: P (x) =
The Alonso-Muth condition
u(.) u(.)
h / z .
foc and soc define a unique implicit Marshallian demand for housing h(x) at
each location.
Recover Marshallian demand for the numeraire: z(x) = w x P (x) h(x).
Alonso-Muth condition: a marginal move away from the cbd leads to a fall in
the cost of current housing consumption falls that just offsets the increase in
commuting costs.
Differencing to get the optimal location choice:
It reflects a tradeoff between accessibility and higher housing prices.
Residential equalisation: u(h(x), w x P (x) h(x)) = u.

u(h,z) h(x) u(h,z)
h(x) u(h,z)
dP (x)
P (x)
+ h(x)
=0.
h
x
z
x
z
dx
Simplifying using the foc (envelop theorem):
dP (x)
=
.
dx
h(x)
First gradient: housing prices decrease with distance to the cbd.
(1)
This is usually taken as a qualitative prediction but this is really a quantitative

relationship.
(2)
This is known as the Alonso-Muth condition.
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The bid-rent approach
The Alonso-Muth condition
An alternative solution uses the bid-rent approach.

Define the bid-rent function for housing (x, u) as the maximum price a
resident is willing to pay for housing at distance x from the cbd while enjoying
utility u and satisfying the budget constraint:
(x,u) max {P (x)|u(h, z) = u, w x = P (x) h(x) + z(x)} .
h(x), z(x)
To reduce the problem to a single constraint, one can solve the budget
constraint for P (x) and replace this into the original programme to obtain

w x z(x)
| u(h, z) = u .
(x,u) = max
h(x),z(x)
h(x)
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Application of the envelope theorem to equation (5) yields:
dP (x)
d(x, u)
=
=
<0,
dx
dx h(x)=h((x, u),u)
h(x)
(3)
(6)
This is again the Alonso-Muth condition.

The bid-rent approach is more direct then the Marshallian approach but
departs further from the standard consumer problem.
(4)
We can then turn the programme into an unconstrained maximization problem

by replacing z(x) with the restricted Hicksian demand for the numraire
z(h(x),u):

w x z(h(x), u)
(x, u) = max
.
(5)
h(x)
h(x)
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Housing consumption
Deriving housing prices in x
z
The consumption of housing when the individual pays the bid-rent price can be
obtained from the first-order condition for the programme of equation (5):
z(h(x),u)
h(x) + w x z(h(x), u) = 0 .
h(x)
w x
(7)
z( x ) = w x P( x )h( x )
Note that this can be rewritten as

z(h(x),u)
w x z(h(x), u)
=
,
h(x)
h(x)
z( x )
(8)
where the left-hand side is the slope of the indifference curve u(h, z) = u and
the right-hand side is the slope of the budget constraint.
u(h, z) = u
P( x )
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Comparative statics
h( x )
h
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The dual approach

For the third path to the solution, we use a dual representation of the utility
v
function v(P (x), w x), where Pv(x) < 0, and (wx)
> 0. The residential
equilibrium can be re-stated as
z
w x1
v(P (x), w x) = u .
(9)
By the definition of the expenditure function e(P (x),u):

e (P (x), v(P (x), w x)) = w x .
w x2
z ( x1 )
z ( x2 )
h ( x1 )
Substituting equation (9) into (10) and totally differentiating with respect to x
yields
e(P (x),u) dP (x)
= ,
(11)
P (x)
dx
u(h, z) = u
P ( x1 )
h ( x2 )
(10)
which implies the Alonso-Muth condition immediately after using Shephards

Lemma:
dP (x)
= e(P (x),u) =
<0.
(12)
dx
h(P (x),u)
P ( x2 )
h
P (x)
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Housing consumption
Housing supply and land prices
Differentiate the Hicksian demand for housing with respect to x:

h(P (x), u) h(P (x), u) dP (x)
=
>0.
x
P (x)
dx
(13)
To supply housing, a perfectly competitive construction industry uses land and

capital under constant returns to scale to produce an amount f(x) of housing
floorspace per unit of land at a distance x from the cbd.
The rental price of land, R(x), varies across the city.
The rental price of capital is constant and exogenously given.
The zero profit condition can then be written as
P (x) = c(R(x)) .
Second gradient: residents react to this lower price by consuming more

housing (larger residences) the farther they live from the cbd.
Totally differentiating equation (14) with respect to x yields

dP (x) c(R(x)) dR(x)
=
,
dx
R(x) dx
Note this is a pure substitution effect, since utility is being held constant at u.
This also implies that the price of housing is convex in distance to the cbd
(house prices do not need to fall as fast as commuting costs increase with
distance to the cbd to keep residents indifferent, since they enjoy larger
houses).
which implies
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dP (x)
f(x) < 0 ,
dx
(16)
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A closed city
Land is built if the rent R(x) it can fetch in residential use is at least as high as
the rent R it can fetch in the best alternative use (e.g., agriculture).
The city edge x is such that R(x) = R.
The physical extent of the city must also be sufficient to hold its population N:
Zx
N = n(x)dx ,
(17)
0
where n(x) denotes population density.

Using equations (12) and (16), we can express population density as
The closed city version of the monocentric city model treats population N as a
parameter (short-run analysis).
Valuing equation (14) at x = 0 and using (19), we can write price of housing at
the cbd as P (0) = c(R + N).
The spatial equilibrium condition holds for any location in the city, so valuing it
at an arbitrary x and at x = 0, and using the previous expression for P (0) yields
(18)
v(P (x), w x) = uN = v(P (0), w)
= v(c(R + N), w) .
Fifth gradient: population density falls with distance from the cbd (a
consequence of housing consumption per person increasing and housing supply
per unit of land decreasing).
Substituting n(x) from equation (18) into equation (17), solving the integral,
and using R(x) = R yields N = R(0)R
. This implies a very simple expression for
land rent at the cbd (x = 0):
R(0) = R + N .
1
c(R(x))
R(x)
City population and density
dR(x) dP (x)
=
dx
dx
(15)
where the simplification follows from the envelope theorem.

Third gradient: land prices fall as one moves away from the cdb.
Fourth gradient: The construction industry reacts to lower land prices by
building with a lower capital/land ratio further away from the cdb (fewer
stories, larger gardens).
dR(x) dP (x)
/
f(x)
1 dR(x)
n(x) =
=
= dx dP dx
.
(x)
h(x)
dx
/ dx
(14)
(20)
This can be inverted to solve for house prices P (x) as a function of x, N, w, ,

and R.
(19)
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An open city
Travel and travel costs

Travel costs are also time costs (or utility costs). The monocentric model can
be easily extended to include leisure in utility. Using T (x) instead of implies a
generalised Alonso-Muth condition:
The open city version of the monocentric city model allows N to be

endogenously determined by migration across cities to attain a common utility
level u.
1 dT (x)
dP (x)
=
(instead of
)
dx
h(x) dx
h(x)
For this, we use the condition of utility equalisation across cities:

v(c(R + N), w) = u .
(21)
Multiple modes of transportation can be considered and more structure can be

imposed to the road network for two-dimensional cities.
This spatial equilibrium condition can be inverted to solve for N as a function of

u, w, , and R.
Richer notions of accessibility can also be considered (shopping, etc).
Note: closed- and open-city models are identical if one uses the value of
equilibrium utility uN of the closed-city model in the open-city case.
Other variables may vary with distance to the cbd: amenities, local public good
provision, etc.
This can generate non-monotonic gradients (locally).
Thus, accessibility cannot be reduced to a monetary costs of distance to the

cbd and is not the sole determinant of land use.
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Gradients
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The forgotten quantitative predictions
The monocentric model also offers a number of quantitative predictions.

1. The Alonso-Muth condition (the marginal increase in housing costs equals
the marginal reduction in travel costs): h(x) dPdx(x) = dTdx(x) .
2. An equivalent Alonso-Muth condition for land prices that adjusts for
dT (x)
density: dR(x)
dx = n(x) dx .
3. Housing development should be proportional to
the ratio of land price
dR(x)
gradients to housing price gradients: f(x) = dPdx(x) .
Five gradients from the monocentric model:

1. Housing prices decrease with distance to the cbd.
2. Because of lower prices, housing consumption by residents increases with
distance to the cbd.
3. Profit maximization by competitive constant-returns builders leads land
prices to decrease with distance to the cbd.
4. This also leads the capital/land ratio to decrease with distance to the cbd.
5. In turn, the previous gradients imply that population density decreases with
dx
4. Differential land rent at the cbd should be proportional to city population.

5. Proportionality between transport costs and differential land rent
aggregates.
These quantitative predictions have been largely ignored.
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Data issues in the estimation of gradients
Methodological issues in the estimation of gradients
How to define centres?

Ad-hoc definition.
Peak in commercial density or in economic activity (e.g., night lights in
Baum-Snow, Brandt, Henderson, Turner, and Zhang, 2013).
Historically, data availability was a binding constraint.

Usually a small number of cities (often one).
Highly selected cities.
How to define subcentres?

McMillen (2001) obtains them as locations with higher employment density
than nearby areas that help explain density in such areas.
A lot of within country variation in gradients mostly unexplored.

Some work in time series variation, but limited (McMillen, 1996).
Residential density is not area density.

Endless debates about functional forms for the spatial decay.
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The empirics of gradients:

population density and land prices
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Within-city variations in population density
Large literature starting with Clark (1951).

Generally negative density gradients, except in some heavily constrained cities.
Gradients become flat in far suburbs.
Richer patterns at a micro-scale (subcenters, etc.).
Some work on land prices, supportive of negative gradients.
Source: Alain Bertaud (http://alainbertaud.com/)
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Density and land price profiles

housing prices
Some work on housing prices, generally supportive of negative gradients, but

subject to difficulties.
Unit housing prices are hard to obtain and hedonics are potentially
problematic.
Floorspace data is not easily available.
The model expects house characteristics to be determined jointly with
Work by Cheshire and Sheppard (1995) and Ahlfeldt (2011) is most advanced.
Source: Alain Bertaud (http://alainbertaud.com/)
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development intensity and housing consumption
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Land prices and building heights in Chicago
Close to no work on the intensity of development. Two recent exceptions:

McMillen (2006).
Ahlfeldt and McMillen (2015) study land prices and building heights in
Chicago over a long period.
* In 2000, the elasticity of building heights with respect to land prices was
45% for tall commercial buildings and 30% for tall residential buildings.
* These elasticities have increased over time.
Even less work on housing consumption
Source: Ahlfeldt and McMillen (2015)
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A misconstrued debate
Commuting infrastructure and population growth
Joint test of the (assumed) monocentric assumption and the Alonso-Muth

trade-off.
Local transportation improvements are often justified on the basis that they
promote city growth.
But no city is truly monocentric.
The monocentric city model sustains this claim.
The interesting questions regards the Alonso-Muth trade-off.
Consider a local improvement in transportation that lowers in one particular

city within a large urban system.
Some work that considers accessibility more generally, but

it imposes arbitrary accessibility indices,
or uses model-based indices that are never validated by looking at actual
travel behaviour.
It follows immediately from the spatial equilibrium condition v(c(R + N), w) = u

that a reduction in commuting costs increases this citys population with unit
elasticity.
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Residential and agricultural land rent against distance to the cbd
R( x )
NC
R (0) R ( x C )
=
N
R (0) R
R ( xC
t+1,t log Ni = 0 N t+1,t log i + it .
)
This regression belongs to a much broader class of regressions where the

growth of cities is regressed on a number of explanatory variables.
R( x )
R
0
xC
(22)
where i indices cities, t+1,t is a time-differencing operator between period t

and period t + 1, N is elasticity of interest (predicted to be unity), and an
error term which, for the time being, we can interpret as a random disturbance.
R( x )
R ( xC )
An urban growth regression
This prediction of a unit elasticity of city population with respect to commuting

costs maps directly into the following regression:
R (0)
NC
R (0) R ( x C )
=
N
R (0) R
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x
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Estimating the model, not testing it
Regressing changes on levels vs. changes on changes
Testing whether the coefficient N estimated in regression (22) differs from

unity is more than a test of the core mechanism of the monocentric city model.
It is a joint test of several assumptions in that model, including the linearity of
commuting costs and free labour mobility.
Because we do not expect all the conditions leading a unit population elasticity
to hold, being able to reject that the estimated value of N is exactly one is of
secondary importance.
Instead, we are primarily interested in knowing whether commuting costs affect
the population of cities and how important this factor might be both in
absolute terms and relatively to other drivers of urban growth.
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Rather than assume free labour mobility in a static sense, one could think of
the equilibrium population N that satisfies equation (21) as a steady-state
towards which the city converges.
New housing takes time to build and we cannot expect an immediate
adjustment of city population after a change in commuting costs.
We might instead posit the following myopic adjustment process where
( can be interpreted as a rate of convergence).
Nt+1 = N N1
t
Substituting this adjustment process into the implication of the spatial
equilibrium condition (21) that N should be constant in steady state, taking
logs and rearranging leads to the following regression:
t+1,t log Ni = 0 log Nit N log it + it .
A changes on changes regression like (22) and a changes on levels like (23) use
very different sources of variation in the data and, as a result, suffer from
different identification problems.
Ideally, this choice of specification should be driven by informed priors about
how population adjusts.
Estimating the relationship between transport and urban growth
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Instrumenting roads
Regression (23) is very close to the main regression estimated in Duranton and
Turner (2012), where the dependent variable is the change in log employment
between 1983 and 2003 for us metropolitan areas.
The two key identification concerns associated with the estimation of (23) are
The existence of possible missing variables that drive urban growth and are
correlated with roads.
Reverse causation where new roads are assigned on the basis of expected
growth.
(23)
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To tackle these estimation issues, Duranton and Turner (2012) use an

instrumental variable (iv) approach and instrument their key independent
variables, the log of 1983 lane kilometres of interstate highways, by three
historical measures of roads.
A reasonable iv strategy needs to
1. Establish that the instruments are relevant and strong.
2. Provide a plausible argument that the instruments are independent from the
dependent variable.
3. Preclude alternative indirect channels of correlation between the
instruments and the dependent variable.
4. Show that different instruments provide the same answer, and
5. Provide out of sample evidence explaining differences between ols and iv
estimates.
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Transport improvements and urban growth in practice
Commuting infrastructure and suburbanization

The model described above highlights that, following a decline in unit commuting
costs, cities should experience an influx of population.
To accommodate this larger population cities should physically expand
outwards and experience rising densities.
Duranton and Turner (2012) find an elasticity of city employment in 2003 with
respect to 1983 lane kilometres of interstate highway of 0.04 with ols and 0.11
with iv.
Of these two channels, the first is more important.

To see this, consider any arbitrary point x. Think of the segment between the
cbd and x as the historical central city, and the segment between x and the
city edge x as the suburbs.
This suggests that road building is endogenous to urban growth, but because
more roads are built in cities with slow growth rather than in cities with fast
growth.
They provide evidence that this is the case.
Then, using equations (17) and (18) we can write the ratio of population in the
historical centre NC to population in the suburbs NS as
NC
R(0) R(x)
=
.
NS
R(x) R
It follows that
NC
NS
(24)
falls as falls.
This implies that improvements in local transportation foster the

suburbanisation of population.
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Residential and agricultural land rent against distance to the cbd
R (0)
Commuting infrastructure and suburbanization in practice
The main finding (using iv) of Baum-Snow (2007) is that an extra ray of
interstate highways leads to a decline in central city population of about 9
percent.
NC
R (0) R ( x C )
=
N
R (0) R
R ( xC )
This iv estimate is larger than its ols counterpart, perhaps because more
highways were built in cities that suburbanised less.
R( x )
R ( xC )
Other explanations for the decline of central cities in the United States have
focused on social and material ills such as crime (Cullen and Levitt, 1999), the
degradation of the housing stock (Brueckner and Rosenthal, 2009), racial
preferences (Boustan, 2010), and changes in the school system (Baum-Snow
and Lutz, 2011).
R( x )
R
0
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The relationship between roads and suburbanisation is explored in Baum-Snow

(2007).
R( x )
NC
R (0) R ( x C )
=
N
R (0) R
xC
x
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Heterogeneous residents
Comparing rent gradients

If housing is essential, residents from both groups must consume a positive
amount of housing.
The standard monocentric model assumes the existence of a representative

resident.
This implies that, in some locations, poor residents must outbid rich residents,
and the opposite at other locations.
From the theoretical standpoint, generating asymmetric outcomes from ex

ante symmetric agents is a strength.
Consider one such boundary point

x separating rich and poor.
At
x, the bid rents of rich and poor must be the same: P0 (
x,u0 ) = P1 (
x,u1 ).
However, it is important to understand how household heterogeneity affects

residential location patterns.
If housing is a normal good, rich residents must then consume more housing
than poor residents at
x: h(P1 (
x,u1 )) > h(P0 (
x,u0 )).
A simple way to model household heterogeneity is to consider different groups

with, e.g., heterogeneous income levels.
Using the Alonso-Muth condition, this implies
Consider for instance

N0 poor residents with a wage w0 and a utility level u0
and N1 rich residents with a wage w1 > w0 and a utility level u1 > u0 .
dP1 (
x)
dP0 (
x)
=
.
>
=
dx
h(P1 (
x),u1 )
h(P0 (
x),u0 )
dx
(25)
Thus, the rent gradient should be steeper for poor residents than for rich
residents.
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Absent commuting cost differences, the poor live centrally
Introducing commuting cost differences

The cost of commuting involves a time cost.
The opportunity cost of time is likely larger for rich residents.
Working in the opposite direction is the fact that poor residents are more likely
to rely on public transport.
With different commuting costs for poor and rich 0 and 1 the condition for
poor residents to occupy small central dwellings and rich residents to live in
larger residences out in the suburbs is
If poor residents have a steeper housing price gradient, in equilibrium they will
live closer to the cbd whereas rich residents should live further away.
Hence, when
commuting costs are the same for both groups
and housing is a normal good,
poor residents are predicted to occupy small dwellings close to the cbd where
housing is more expensive.
dP1 (
x)
1
0
dP0 (
x)
=
.
>
=
dx
h(P1 (
x),u1 )
h(P0 (
x),u0 )
dx
This is because rich residents are more willing to pay greater commuting costs
and live further from the cbd since their higher wage allows them to consume
more land.
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(26)
Thus, rich residents live further out if the ratio of commuting costs per unit
distance to housing consumption is lower for them (note the minus signs).
The condition is also frequently expressed in terms of elasticities: rich
residents live further out if the income elasticity of commuting costs is smaller
than the income elasticity of the demand for housing.
Finally, the condition is also sometimes expressed in terms of the income
elasticity of the demand for land.
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Patterns of residential sorting by income
Explaining residential sorting by income
Looking at the historical record for the United States, LeRoy and Sonstelie
(1983) argue that:
Until the second half of the 19th century, richer residents were living in more
central locations.
That pattern reversed afterwards with the emergence of the streetcar
followed by the rise of the car.
Some re-gentrification of central cities occurred after 1970.
To assess the ability of the monocentric model with heterogeneous residents

to explain residential location patterns by income, one needs to estimate and
compare
the income elasticity of the demand for housing/land
and the income elasticity of the cost of commuting.
Lee and Lin (2013) looking at major us cities:

Confirm that average neighbourhood income declined with distance to the
cbd in 1880.
This income gradient changed sign by 1930 and became very steep by 1940.
Since 1960 the income gradient has flattened, a process that continues.
The first attempt was made by Wheaton (1977).

He estimates the income elasticity of the demand for land and the income
elasticity of commuting costs to be roughly equal.
This suggest that the net effect of income on location within the city
stemming from the tradeoff highlighted by the monocentric model is likely
too small to explain actual residential patterns.
This broad characterisation is far from an absolute norm.

A few American cities have a rich central part (e.g., New York).
Importantly, as highlighted by Brueckner, Thisse, and Zenou (1999), European
cities tend to have rich cores and poor peripheries with, again, some
exceptions such as Brussels.
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Glaeser, Kahn, and Rappaport (2008) revisit the issue.
Then, they focus their attention to estimating the income elasticity of the
demand for land.
Some caveats:
The Glaeser, Kahn, and Rappaport (2008) estimate of the income elasticity
of the demand for land is likely to be downward biased.
More importantly, the true income elasticity of commuting costs is likely to
be substantially below one.
Given that their estimate for the income elasticity of the demand for land is
well below the unit income elasticity of commuting costs that they assume,
they conclude that the monocentric model with heterogeneous residents
strongly predicts that richer households should live in the center.
Brueckner, Thisse, and Zenou (1999) focus on the difference between typical
American cities where the poor live in the urban core and typical European
cities where the core is occupied by the rich and propose an amenity-based
explanation.
Since this is counterfactual, they argue that transit is important for

explaining why the poor live close to the urban core of American cities.
The relevance of the monocentric model with heterogeneous agent to explain

patterns of location by income is still very much an open question.
They do not estimate the income elasticity of commuting costs. They argue
that since commuting is mainly paid in time, it should be about one.
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Endogenizing firm location
Facts about employment decentralisation
In us cities, only 24% of jobs within 5 km of the cbd in 1996.

In the monocentric model, firms do not use any land and locate, by assumption,
at a single central point.
In reality, employment is partly decentralised.
Share of central city jobs went from 61% in 1960 to 34% in 2000.
Employment decentralisation has been considerable but less than residential
decentralisation.
Employment decentralisation started later but is highly correlated with
residential decentralisation.
Firms use land as an input and the division of land between residential and
commercial uses within a city follows complex patterns.
Skilled jobs have decentralised less, manufacturing jobs have decentralised

more.
Considerable heterogeneity across cities.
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Diffuse decentralisation or movement towards subcentres?
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The Ogawa and Fujita (1980) urban model
We now review a model by Ogawa and Fujita (1980) and Imai (1982).
They endogenise the location of both firms and workers throughout the city.
Firms trade-off productivity spillovers from locating in areas with high
commercial density against having to compensate workers for longer
commutes.
Areas emerge endogenously with commercial, residential or mixed land use as
a result of the interactions of the location decisions of all agents directly
with each other and through land markets.
Some evidence about subcentres (McMillen and Smith, 2003).

No measure of diffuseness of decentralization?
Glaeser and Kahn (2001) claim diffuse decentralisation for the us.
Garcia-Lpez, Hmet, and Viladecans-Marsal (2015) provide evidence of
subcentre growth and emergence for Greater Paris.
Lucas and Rossi-Hansberg (2002) extend the model to allow for

substitutability between land and labour for firms and between housing and
other goods for consumers.
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The city
Agglomeration economies
The city occupies a segment of endogenous length on the real line with one unit
of land available at each location x.
In the standard monocentric model, all firms concentrate at the Central

Business District by assumption.
Denote by m(x) the endogenous density of firms.
We now explicitly model the advantages for firms of locating close to each other.
and by n(x) the endogenous density of residents at location x.
These advantages, or agglomeration economies, arise due to spillovers that

raise a firms productivity when its workers are able to interact more closely
with other workers in the city.
In equilibrium, there can be

areas with mixed land use (m(x) > 0 and n(x) > 0),
areas with only commercial development (m(x) > 0 and n(x) = 0),
and areas with only residential development (m(x) = 0 and n(x) > 0).
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Spatial spillovers
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Commercial bid-rent
Each firms produces using one unit of labour and units of land one unit of
output for every unit of communication involving its workers.
Its cost function is (w(x) + P (x))/A(x) where A(x) denotes communication.
Communication between workers depends on how far their jobs are located,
starting at units and decreasing at a rate per unit of distance.
Free entry of firms exhausts their profits.
The output of a firm choosing to locate at x then depends on the location of all
other firms:
Z
A(x) =
( |x y|)m(y)dy .
The bid-rent function for commercial land (x) is the maximum price a firm can
pay for land at each location x while making zero profits:
(27)
(x) =
A(x) reaches a global maximum at the point in the city where half the firms are
located to its left and half the firms are located to its right.
1
[A(x) w(x)] .
(28)
Without loss of generality, assign coordinate x = 0 to this point

Furthermore, A(x) is a concave function of x in areas wherever there is
commercial development (m(x) > 0) and a linear function of x wherever there is
no commercial development.
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Job location choices and commuting
Residential bid-rent
To simplify, assume that all residences have the same unit size.
In the standard monocentric model each worker commutes from her location x
to the exogenous cbd located at 0.
Then maximising utility u(1, z) subject to the budget constraint

w(x) |x T (x)| = P (x) 1 + z(x) is equivalent to maximising consumption of
the numraire z(x) = w(x) |x T (x)| P (x).
Now, instead, a worker residing at x chooses the work location that best suits
her.
Suppose all houses are built with one unit of land and a fixed amount of capital.
We maintain the assumption of commuting costs increasing linearly with

distance at a rate .
Set both the constant cost of capital throughout the city and the price of
land in agriculture equal to 0.
Let T (x) denote the utility-maximising job location of a worker as a function of

her residential location x:
T (x) arg max {w(y) |x y|} .
y
(29)
Thus, for a given residential location, workers choose their job location trading
off wages against commuting costs.
The bid-rent function for housing and for residential land (x, u) is the
maximum price a resident can pay for housing at each location x while
consuming the amount of numraire z(u) that allows her to enjoy utility u and
while also satisfying the budget constraint:
(x,u) = w(T (x)) |x T (x)| z(u) .
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(30)
Equilibrium conditions
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Equilibrium configuration
Land will be allocated to the highest bidder:

R(x) = max((x), (x,u)) ,
(31)
R(x) = (x) if m(x) > 0 ,

R(x) = (x,u) if n(x) > 0 .
(32)
(33)
m(x) + n(x) = 1 if R(x) > 0 ,
(34)
m(x) = n(x) = 0 if R(x) < 0 .
(35)
Land use is described by:
Labour market clearing implies

Z
Z
n(x)dx =
X
m(x)dx ,
If this combination of parameters is within some intermediate range

( N2 < (1+)
< N), we have the richest equilibrium configuration.
T (X)
for every interval X.

Finally, we must consider the aggregate population and firm constraints:
Z
Z
n(x)dx = N ,
m(x)dx = N .
(36)
The equilibrium depends on the value of (1+)

, which is
increasing in the rate at which commuting costs increase with distance
and in the land requirement of firms ,
and decreasing in the rate at which productivity spillovers decay.
(37)
Equations (27)-(37) are the equilibrium conditions of this framework.

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64 / 77
Share of land in commercial use
Spillovers
A( x )
1+
x1
x0
x0
x1
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x1
x0
x0
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Wages
Bid-rent gradients
w( x )
( x,u) = ( x )
( x )
( x )
( x,u)
x1
x0
x1
x0
x1
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( x,u)
x1
x0
x0
x1
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Alternative equilibrium configurations
100%
For firms, being clustered together in a purely commercial area

increases their productivity through spillovers (with the gain from proximity
being greater the higher the spillover decay ),
but forces them to compensate their workers for commuting costs (which
are greater the higher the cost per unit of distance, , and the more space
that each firm takes up, ).
Share of builtup land by use
Commercial
75%
50%
Singlefamily
residential
N
, productivity spillovers dominate commuting costs and the
If < 2(1+)
mixed-use area does not exist.
25%
Multifamily residential
0%
30
20
10
10
20
In this case, there is a central commercial area surrounded by two residential

areas (an endogenously monocentric city).
30
69 / 77
Bid-rent gradients with
( x )
<
70 / 77
Alternative equilibrium configurations
N
2(1+)
Finally, if N 6 (1+)
, we are at the opposite extreme and commuting costs
dominate productivity spillovers.
( x )
The pure commercial and residential areas then do not exist.

( x,u)
Residential area
In this case, the entire city is under mixed-use and every worker lives where they
work.
( x,u)
x1
0 = x0
cbd
x1
Residential area
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Structural estimation of spatial spillovers and accesibility
Land prices in Berlin, 1936
Ahlfeldt, Redding, Sturm, and Wolf (2015) combine structural estimation with a
quasi-experiment.
The context is Berlin in 1936, 1986, and 2006.
In 1936 Berlin was a unified city.
In 1986 the Berlin wall separated East and West Berlin.
In 2006 the wall was gone.
The wall matters for spillovers because it blocks all interactions across
different sides of the wall.
The key feature of the data driving estimates of spillovers is that after the wall
was built, land prices collapsed near the wall. The pattern was reversed when
the wall was taken down.
The paper separately identifies agglomeration benefits in production (from
proximity to workers) from agglomeration benefits in consumption (from
proximity of residents).
Source: Ahlfeldt, Redding, Sturm, and Wolf (2015)
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Land prices in West Berlin, 1936
Land prices in West Berlin, 1986
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Land prices in Berlin, 2006
References I
Ahlfeldt, Gabriel. 2011. If Alonso was right: Modeling accessibility and explaining
the residential land gradient. Journal of Regional Science 51(2): 318338.
Ahlfeldt, Gabriel, Stephen J. Redding, Daniel Sturm, and Nikolaus Wolf. 2015. The
economics of density: Evidence from the Berlin wall. Econometrica 83(6):
21272189.
Ahlfeldt, Gabriel M. and Daniel P. McMillen. 2015. The vertical city: The price of land
and the height of buildings in Chicago 18702010. Processed, London School of
Economics.
Alonso, William. 1964. Location and Land Use; Toward a General Theory of Land
Rent. Cambridge, ma: Harvard University Press.
Baum-Snow, Nathaniel. 2007. Did highways cause suburbanization? Quarterly
Journal of Economics 122(2): 775805.
Baum-Snow, Nathaniel, Loren Brandt, J. Vernon Henderson, Matthew A. Turner,

and Qinghua Zhang. 2013. Roads, railroads and decentralization of Chinese
cities. Processed, Brown University.
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References II
Baum-Snow, Nathaniel and Byron F. Lutz. 2011. School desegregation, school
choice and changes in residential location patterns by race. American
Economic Review 101(7): 30193046.
Boustan, Leah Platt. 2010. Was postwar suburbanization white flight? Evidence
from the black migration. Quarterly Journal of Economics 125(1): 417443.
Brueckner, Jan K. and Stuart S. Rosenthal. 2009. Gentrification and
neighborhood housing cycles: will Americas future downtowns be rich? Review of
Economics and Statistics 91(4): 725743.
Brueckner, Jan K., Jacques-Franois Thisse, and Yves Zenou. 1999. Why is central
Paris rich and downtown Detroit poor? An amenity-based theory. European
Economic Review 43(1): 91107.
Cheshire, Paul and Stephen Sheppard. 1995. On the price of land and the value of
amenities. Economica 62(246): 247267.
Clark, Colin. 1951. Urban population densities. Journal of the Royal Statistical
Association Series A 114(4): 490496.
Cullen, Julie Berry and Stephen D. Levitt. 1999. Crime, urban flight, and the
consequences for cities. Review of Economics and Statistics 81(2): 159169.
References III
Duranton, Gilles and Diego Puga. 2015. Urban land use. In Gilles Duranton, Vernon
Henderson, and William Strange (eds.) Handbook of Regional and Urban
Economics, volume 5. Amsterdam: North-Holland, 467560.
Duranton, Gilles and Matthew A. Turner. 2012. Urban growth and transportation.
Review of Economic Studies 79(4): 14071440.
Garcia-Lpez, Miquel-ngel, Camille Hmet, and Elisabet Viladecans-Marsal. 2015.
Job decentralization, subcenter formation and public transportation.
Processed, Institut dEconomia de Barcelona.
Glaeser, Edward L. and Matthew Kahn. 2001. Decentralized employment and the
transformation of the American city. Brookings-Wharton Papers on Urban
Affairs : 147.
Glaeser, Edward L., Matthew E. Kahn, and Jordan Rappaport. 2008. Why do the
poor live in cities? The role of public transportation. Journal of Urban
Economics 63(1): 124.
Imai, Haruo. 1982. cbd hypothesis and economies of agglomeration. Journal of
Economic Theory 28(2): 275299.
References IV
References V
Lee, Sanghoon and Jeffrey Lin. 2013. Natural amenities, neighborhood dynamics,
and persistence in the spatial distribution of income. Processed, Federal
Reserve Bank of Philadelphia.
LeRoy, Stephen F. and Jon Sonstelie. 1983. The effects of urban spatial structure
on travel demand in the United States. Journal of Urban Economics 13(1):
6789.
Lucas, Robert E., Jr. and Esteban Rossi-Hansberg. 2002. On the internal
structure of cities. Econometrica 70(4): 14451476.
McMillen, Daniel P. 1996. One hundred fifty years of land values in Chicago: A
nonparametric approach. Journal of Urban Economics 40(1): 100124.
McMillen, Daniel P. 2001. Nonparametric employment subcenter indentification.
Journal of Urban Economics 50(3): 448473.
McMillen, Daniel P. 2006. Testing for monocentricity. In Richard J. Arnott and
Daniel P. McMillen (eds.) A Companion to Urban Economics. Oxford: Blackwell,
128140.
McMillen, Daniel P. and Stefani C. Smith. 2003. The number of subcenters in large
urban areas. Journal of Urban Economics 53(3): 332342.
Mills, Edwin S. 1967. An aggregative model of resource allocation in a metropolitan

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Muth, Richard F. 1969. Cities and Housing. Chicago: University of Chicago Press.
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Distribution of land across uses in Paris

Accesibility and land use in a city:

Source: Duranton and Puga (2015)

Distribution of land across uses in Paris

Land use is of fundamental importance:

Share of builtup land by use

Share of land by use

Urban land use and accessibility

Accessibility is also important:

Urban land use and accessibility are intimately connected:

Distance to Notre Dame (km.)

Distance to Notre Dame (km.)

Source: Duranton and Puga (2015)

Urban Economics. Diego Puga

Urban Economics. Diego Puga

The monocentric model

Population and preferences

General models of accessibility are hard because the location choice of

Urban Economics. Diego Puga

The Marshallian approach

Consider a linear monocentric city.

There are several ways to solve this model.

The consumer problem is a standard consumer maximisation problem with two

Urban Economics. Diego Puga

Urban Economics. Diego Puga

The Marshallian approach

Given locations, utility maximisation implies: P (x) =

The Alonso-Muth condition

Differencing to get the optimal location choice:

It reflects a tradeoff between accessibility and higher housing prices.

Residential equalisation: u(h(x), w x P (x) h(x)) = u.

Simplifying using the foc (envelop theorem):

First gradient: housing prices decrease with distance to the cbd.

This is usually taken as a qualitative prediction but this is really a quantitative

This is known as the Alonso-Muth condition.

Urban Economics. Diego Puga

Urban Economics. Diego Puga

The bid-rent approach

The Alonso-Muth condition

An alternative solution uses the bid-rent approach.

Application of the envelope theorem to equation (5) yields:

This is again the Alonso-Muth condition.

We can then turn the programme into an unconstrained maximization problem

Urban Economics. Diego Puga

Deriving housing prices in x

Note that this can be rewritten as

Urban Economics. Diego Puga

The dual approach

By the definition of the expenditure function e(P (x),u):

which implies the Alonso-Muth condition immediately after using Shephards

Urban Economics. Diego Puga

Housing supply and land prices

Differentiate the Hicksian demand for housing with respect to x:

To supply housing, a perfectly competitive construction industry uses land and

Second gradient: residents react to this lower price by consuming more

Totally differentiating equation (14) with respect to x yields

where n(x) denotes population density.

v(P (x), w x) = uN = v(P (0), w)

Urban Economics. Diego Puga

City population and density

Urban Economics. Diego Puga

where the simplification follows from the envelope theorem.

Urban Economics. Diego Puga

t+1,t log Ni = 0 N t+1,t log i + it .