Review of the 'Handbook of Regional and Urban Economics: Volume 4: Cities and Geography' edited by J.V. Henderson and J.-F. Thisse

Marcus Berliant

English

Research Papers in Economics

Well Isn￿ t That Spatial?! Handbook of
Regional and Urban Economics: A View
From Economic Theory￿
Marcus Berlianty
February 2005
￿I thank Gilles Duranton, Sukkoo Kim, Fan-chin Kung and Ping Wang for comments,
implicating them only for baiting me.
yDepartment of Economics, Washington University, Campus Box 1208, 1 Brookings
Drive, St. Louis, MO 63130-4899 USA. Phone: (314) 935-8486, Fax: (314) 935-4156,
e-mail: berliant@economics.wustl.edu
1As a younger and more na￿ve reviewer of the ￿rst volume of the Handbook
(along with Thijs ten Raa, 1994) more than a decade ago, it is natural to begin
with a comparison for the purpose of evaluating the progress or lack thereof
in the discipline.1 Then I will discuss some drawbacks of the New Economic
Geography, and ￿nally explain where I think we should be heading. It is my
intent here to be provocative2, rather than to review speci￿c chapters of the
Handbook.
First, volume 4 cites Masahisa Fujita more than the one time he was cited
in volume 1. Volume 4 cites Ed Glaeser more than the 4 times he was cited
in volume 3. This is clear progress.
Second, since the ￿rst volume, much attention has been paid by economists
to the simple question: ￿Why are there cities?￿ The invention of the New
Economic Geography represents an important and creative attempt to answer
this question, though it is not the unique set of models capable of addressing
it. The narrow focus of this review will be on the New Economic Geography,
namely applications of the Dixit-Stiglitz (1977) model to the urban context,
as opposed to other models or market failures that are sometimes included
in the de￿nition. Though I will touch on other subjects, it￿ s necessary to
focus in order to bound the length of this note. The essays in the Handbook
dealing primarily with the New Economic Geography are those by Ottaviano
and Thisse, Baldwin and Martin, and Head and Mayer. Many of the other
essays in volume 4 discuss this literature, for example in motivating their work
(e.g. Holmes and Stevens). It also seems to comprise the main body of modern
urban economic research.
For those entering the ￿eld, be they graduate students or faculty, I enthu-
siastically recommend the essays in this volume. It is a unique opportunity
to learn, straight from some of the researchers who created it, the New Eco-
nomic Geography and its implications.3 The editors have done an excellent
job of herding cats. It should be noted that the various authors are reluctant
to cite the early, original work of Fujita (1988), Abdel-Rahman (1988, 1990)
and Abdel-Rahman and Fujita (1990) in this area that pre-dates Paul Krug-
man￿ s entry into the ￿eld. Their direct ancestor is Hesham Abdel-Rahman￿ s
dissertation, written under the direction of Masa Fujita at the University of
1Apparently a draft of the old review (prior to the removal of o⁄ensive language) had an
impact on the current book editor of this journal, who made this suggestion.
2Though not as provocative as Larry Summers.
3First best would be to have seen the papers presented amidst the casino in San Juan at
the RSAI meetings, so the Handbook is actually second best.
2Pennsylvania Regional Science Department and completed in 1987.
Thijs ten Raa and I concluded our review with a series of complaints about
the ￿rst volume and the regional science literature more generally. Regional
science seemed to be focused on technique rather than on attacking interesting
problems. It borrowed such techniques from fads in applied mathematics,
and used them without giving serious consideration to whether the models are
consistent with any sort of individual optimizing behavior or whether prices
matter at all to agents. The latter, of course, is easily testable; as a reviewer,
I continue to receive many papers that simply assume that land prices and
wage rates are irrelevant to agents. I￿ m sure that these regional scientists pay
no attention when they buy houses!
As most of the essays in the new volume are written by researchers with
training in economics, most of these complaints don￿ t apply. But the ￿rst
does, and I have some further complaints directed speci￿cally at the New
Economic Geography. In my role as reviewer and reader of journals, I have
seen many manuscripts whose motivation is not an economic question, but
rather to extend a common paradigm such as the New Economic Geography
in in￿nitely many minor variations. Although this might be a safe strategy for
authors (particularly young authors), I am afraid that this phenomenon can
crowd out riskier and more creative research by establishing certain models as
central. Then papers using them are perceived as publishable. In sum, I am
afraid that this new volume will further encourage less risk taking, though I
hope not.
Since the major focus of modern economics is on market failures, and the
New Economic Geography is the study of the consequences of a particular
market failure in a particular model, the essays in the volume should be of
interest to the general economist. What I fear most is that the generalist
would get a one sided view of the New Economic Geography. Every class of
models has its advantages and disadvantages in addressing economic questions.
Naturally, the authors of this volume, who have nurtured the New Economic
Geography from infancy, have an attachment to the paradigm, and thus have
emphasized its advantages. For the general interest reader, I think that it will
be useful to discuss here some of its disadvantages.
￿ Robustness. As a theorist, I￿ m not used to relying on particular func-
tional forms for results. These are usually called ￿examples,￿not ￿the-
orems.￿If one talks with people working in general equilibrium theory
(I do this as an antidote to geographers), they think that this type of
3model is pretty silly. How can we draw general conclusions about urban
policy from these models if the conclusions change when the utility func-
tions or functional form of transport cost change? Certainly, examples
are a ￿rst step in a research program. But they are usually not the
last.4 And they are sparse in the parameter space, so they might not be
representative.
￿ Indeterminacy. That is, the presence of equilibria that are not locally
unique. I think that this is a problem when there is a continuum of
locations - there appears to be a continuum of equilibria in that case.
Without determinacy, comparative statics are pretty much a lost cause.
It￿ s also very hard to test a model with a continuum of equilibria, both
because comparative statics can￿ t be used, and because the equilibrium
prediction consists of many possibilities. Fujita and Mori (1997) produce
very original and interesting results on the implications of the New Eco-
nomic Geography for central place theory, but use a complicated selection
procedure to get the equilibrium they want; see section 5.2. Berliant
and Kung (2004) show that generically in the speci￿cation of exogenous
parameters, the set of equilibria with K cities contains a manifold of
dimension K ￿ 1.
￿ Welfare. Paul Krugman seems to dislike any normative statements in the
context of the New Economic Geography, though they are indispensable
for policy analysis. Welfare implications of an equilibrium allocation
seem to be dependent on functional form (the ￿rst point) and which
equilibrium is selected (the second point).
￿ Commuting. Not in the model, but a large part of any urban economy.
Some have argued that the New Economic Geography is a model of
regions, but that doesn￿ t mean that researchers use it as such.
￿ Bifurcations. This is a myth, an urban legend, perpetuated by some. A
split bifurcation (as this term is used in urban economics) is the value of
a parameter where the number of elements of the set of equilibria, that
is dependent on a parameter value such as population or transportation
cost, changes. In a more literal sense, one equilibrium splits into two.
If you add enough parameters to the model, those used in the New Eco-
nomic Geography are, in fact, sparse (their complement is generic). One
4My colleagues in political science may dispute this.
4can only generate them by choosing the parameters of the model very
carefully, and making sure that the dimension of the parameter space is
very low (1 or 2). Kung (2004) proves this formally for the standard
model.
￿ Tractability. Only the quasi-linear utility form of the model can be
solved analytically (see Ottaviano et al (2002)); the other forms require
computation. Of course, use of the quasi-linear form prohibits income
e⁄ects, and while computations are trendy, they make life harder than
analytical solutions. I￿ d like to see Masa Fujita and Jacques Thisse
debate this point; probably they already have, in private. Better yet,
I￿ d like to see their students debate this point.
￿ Empirical Evidence. From the outbreak of the epidemic, it was clear that
the empirical evidence was weak. For example, my colleague Sukkoo
Kim (1995) found that the model works well for the 1800￿ s but not the
1900￿ s. Dumais, Ellison and Glaeser (2002)5 found that manufacturing
as a whole dispersed at a rate of 3.2% every ￿ve years in the US, while
textiles agglomerated. With the exception of textiles, this runs counter
to the predictions of these types of models. Krugman (1991, pp. 59-
61) chose textiles as his manufacturing example.6 The chapters in the
Handbook con￿rm weak support.7
￿ Empirical Connections. Some researchers look for evidence of one par-
ticular kind of agglomerative force in their data, say the one used in the
New Economic Geography, but do not test this hypothesis against an-
other, say natural advantages of location. Wouldn￿ t competing models
be of interest? Aside from issues of observational equivalence of models,
to have a strong test of the model, one needs to provide a strong alter-
native hypothesis. Finding that regression coe¢ cients are non-zero is
rather weak, since the alternative is that they are zero. For example,
the alternative could be that nothing a⁄ects agglomeration.
5The working paper was around for many years before publication.
6Gilles Duranton points out that even agglomerated industries tend to change location,
contrary to a prediction of the New Economic Geography model. See Beardsell and Hen-
derson (1999) for evidence in the computer industry.
7Taka Tabuchi has noted that the models of the New Economic Geography assume that
skilled labor is freely mobile, while unskilled labor is completely immobile, and the latter is
inconsistent with casual empiricism. See Steinbeck (1986) for evidence.
5￿ Expanding the scope of criticism beyond the New Economic Geography,
the ￿eld emphasizes steady state or balanced growth, with few analytical
results on the dynamics of urban or regional development. Most dynamic
analysis is again computational. See Berliant and Wang (2004) for more
detail.
So where do we go from here? I want to provide a wish list, not a prediction.
On the empirical side, satellite imaging promises to provide copious and precise
data of interest. When combined with other data sources (e.g. Burch￿eld et
al (2004)), the possibilities are exciting. On the theoretical side, there is much
work to be done:
￿ The derivation of more testable implications to distinguish among the
theories. This is emphasized in several chapters of the Handbook.
￿ The integration of theories. If the literature sticks to functional form
assumptions, this is going to be hard.
￿ Working out the microfoundations of theories of agglomeration (my own
preoccupation right now).
￿ Implications for other ￿elds of economics, in particular public ￿nance.
Most of the theories of cities imply equilibrium allocations that are ine¢ -
cient, due to whatever assumption is used to drive agglomeration, such as
a form of imperfect competition. If we take this seriously, then all other
urban phenomena must be observed thorough the lens of a pre-existing
distortion. The theory of the second best comes into play. So, for ex-
ample, both local and national tax policy analysis must adjust for such
a distortion. This is a good test of whether urban economists actually
believe their models.
￿ The role of information asymmetries in the urban economy, particularly
adverse selection and moral hazard. This is the most important unex-
plored territory. It is relevant not only in the housing market, but for
developers, city managers, zoning boards, and ￿rms.
The Handbook provides an excellent overview of where we are. It should
be used as a base from which future endeavors are launched.
6References
[1] Abdel-Rahman, H., 1988, Product di⁄erentiation, monopolistic competi-
tion and city size, Regional Science and Urban Economics 18, 69-86.
[2] Abdel-Rahman, H., 1990, Sharable inputs, product variety and city sizes,
Journal of Regional Science 30, 359-374.
[3] Abdel-Rahman, H. and M. Fujita, 1990, Product variety, Marshallian
externalities, and city sizes, Journal of Regional Science 30, 165-183.
[4] Beardsell, M. and J.V. Henderson, 1999, Spatial evolution of the computer
industry in the USA, European Economic Review 43, 431-456.
[5] Berliant, M. and F.-C. Kung, 2004, The indeterminacy of equilibrium city
formation under monopolistic competition and increasing returns, Work-
ing Paper at http://econpapers.hhs.se/paper/wpawuwpur/0407011.htm
[6] Berliant, M. and T. ten Raa, 1994, Regional science: The state of the
art, Regional Science and Urban Economics 24, 631-647.
[7] Berliant, M. and P. Wang, 2004, Dynamic urban models: Agglomera-
tion and growth,￿in Urban Dynamics and Growth: Advances in Urban
Economics, edited by Pieter Nijkamp and Roberta Capello (Elsevier).
[8] Burch￿eld, M., H.G. Overman, D. Puga, and M.A. Turner, 2004, The
determinants of sprawl: A portrait from space, Working Paper presented
at the 51st North American Regional Science Association Meetings in
Seattle, WA, at http://dpuga.economics.utoronto.ca/papers/sprawl.pdf
[9] Dixit, A. and J. Stiglitz, 1977, Monopolistic competition and optimum
product diversity, American Economic Review 67, 297-308.
[10] Dumais, G., G. Ellison and E.L. Glaeser, 2002, Geographic concentration
as a dynamic process, Review of Economics and Statistics 84, 193-204.
[11] Fujita, M., 1988, A monopolistic competition model of spatial agglom-
eration: Di⁄erentiated product approach, Regional Science and Urban
Economics 18, 87-124.
[12] Fujita, M. and T. Mori, 1997, Structural stability and evolution of urban
systems, Regional Science and Urban Economics 27, 399-442.
7[13] Kim, S., 1995, Expansion of markets and the geographic distribution of
economic activities: The trends in U.S. regional manufacturing structure,
1860-1987, Quarterly Journal of Economics 110, 881-908.
[14] Krugman, P., 1991, Geography and Trade (MIT Press, Cambridge, MA).
[15] Kung, F.-C., 2004, Genericity analysis of split bifurcations, Working paper
at http://econpapers.hhs.se/paper/wpawuwpge/0410008.htm
[16] Ottaviano, G., T. Tabuchi, and J.-F. Thisse, 2002, Agglomeration and
trade revisited, International Economic Review 43, 409-436.
[17] Steinbeck, J., 1986, The Grapes of Wrath (Viking, NY).
8

Well Isn't That Spatial?! Handbook of Regional and Urban Economics: A View From Economic Theory

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