DP4440 | Trade Costs versus Urban Costs

Publication Date

23/08/2004

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Abstract

We analyse how the interplay between urban costs, wage wedges and trade costs may affect the inter-regional location of firms as well as the intra-urban location, within the central business district or in a secondary employment centre (SEC) of the selected region. In this way we investigate, on the one hand, how trade may affect the internal structure of cities and, on the other hand, how decentralizing the production and consumption of goods to subcentres changes the intensity of trade by allowing large metropolitan areas to maintain their predominance. We show that, despite low commuting costs, SECs may emerge when the urban population is large and communication technologies are efficient, two features that seem to characterise modern economies. Moreover, when trade costs fall from high levels, the economy moves gradually from dispersion to agglomeration, favouring the formation of SECs. In an integrating world, however, the centre of a small monocentric city could be more attractive than subcentres of large polycentric cities. Nevertheless, the core retains its predominance through the relative growth of its main centre, which occurs at the expense of its subcentres.