CEP Discussion Paper No 1154 June 2012 The ... - LSE-CEP

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CEP Discussion Paper No 1154 June 2012 The Economics of Density: Evidence from the Berlin Wall Gabriel M Ahlfeldt, Stephen J. Redding, Daniel M. Sturm and Nikolaus Wolf

Abstract This paper develops a quantitative model of city structure to separate agglomeration forces, dispersion forces and fundamentals as determinants of location choices. The model remains tractable and amenable to empirical analysis because of stochastic shocks to worker productivity, which yield a gravity equation for commuting flows. To empirically disentangle alternative determinants of location choices, we use Berlin’s division and reunification as a source of exogenous variation in the surrounding concentration of economic activity. Using disaggregated data on land prices, workplace employment and residence employment for thousands of city blocks for 1936, 1986 and 2006, we find that the model can account both qualitatively and quantitatively for the observed changes in city structure. Keywords: agglomeration, dispersion, density, cities JEL: N34, O18, R12

This paper was produced as part of the Centre’s Globalisation Programme. The Centre for Economic Performance is financed by the Economic and Social Research Council.

Acknowledgements We are grateful to the European Research Council (ERC), German Science Foundation (DFG), the Centre for Economic Performance and Princeton University for financial support. Daniela Glocker, Kristoffer Moeller, Utz Pape, Ferdinand Rauch, Claudia Steinwender, Sevrin Waights and Nicolai Wendland provided excellent research assistance. We would like to thank conference and seminar participants at AEA, Arizona, Barcelona, Berkeley, Brussels, CEPR, Chicago, Clemson, Columbia, EEA, Mannheim, Marseille, MIT, Munich, Luzern, Nottingham, Oxford, Princeton, Stanford, Tübingen, Virginia and the World Bank for helpful comments. We are also grateful to Dave Donaldson, Cecilia Fieler, Gene Grossman, Bo Honore, Ulrich Müller, Sam Kortum, Eduardo Morales and Esteban Rossi-Hansberg for their comments and suggestions. The usual disclaimer applies. Gabriel Ahlfeldt is a Lecturer in Urban Economics and Land Development at the London School of Economics. Stephen Redding is an International Research Associate of the Centre for Economic Performance, London School of Economics and Professor of Economics, Princeton University. Daniel Sturm is an Associate of the Centre for Economic Performance and a Reader in Economics, London School of Economics. Nikolaus Wolf is a Research Associate at the Centre for Economic Performance, London School of Economics and Professor of Economic History, Humboldt University.

Published by Centre for Economic Performance London School of Economics and Political Science Houghton Street London WC2A 2AE All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means without the prior permission in writing of the publisher nor be issued to the public or circulated in any form other than that in which it is published. Requests for permission to reproduce any article or part of the Working Paper should be sent to the editor at the above address. © G. M. Ahlfeldt, S. J. Redding, D. M. Sturm and N. Wolf, submitted 2012



Economic activity is highly unevenly distributed across space, as reflected in the existence of cities and the concentration of economic functions in specific locations within cities, such as Manhattan in New York and the Square Mile in London. Understanding the strength of the agglomeration and dispersion forces that underlie these concentrations of economic activity is central to a range of economic and policy questions. These forces shape the size and internal structure of cities, with implications for the incomes of immobile factors, congestion costs and city productivity. They also determine the impact of public policy interventions, such as transport infrastructure investments and urban develo