Yujiang Chen and Coen Teulings, January 2020 [Preliminary]
Recent papers suggest a strong interaction between agglomeration externalities and human capital. We develop a general equilibrium model with multiple regions where agglomeration benefits are increasing in human capital. Regions can either be organized as cities with a CBD or as rural areas. The city form is conducive to knowledge spill-overs but city size is limited by commuting cost. We estimate the model on US data on housing prices and wages for 47 states and 34 metropolitan areas from 1979 till 2015. We find strong support for the model. We use the model for the calculation of two counterfactuals: first without cities, and second without any agglomeration benefits. We find that land would loose half its value without cities and almost all its value without any agglomeration benefits.
Keywords: Spatial Sorting, Agglomeration externalities, Cities, Regional wage differentials, Regional house prices