Micro-foundations of urban agglomeration economies

Abstract: This handbook chapter studies the theoretical microfoundations of urban agglomeration economies. We distinguish three types of micro-foundations, based on sharing, matching, and learning mechanisms. For each of these three categories, we develop one or more core models in detail and discuss the literature in relation to those models. This allows us to give a precise characterisation of some of the main theoretical underpinnings of urban agglomeration economies, to discuss modelling issues that arise when working with these tools, and to compare different sources of agglomeration economies in terms of the aggregate urban outcomes they produce as well as in terms of their normative implications. Key words: cities, agglomeration, increasing returns, micro-foundations jel classification: r12, r13, r32 ∗ This is a working draft of a chapter written for eventual publication in the Handbook of Regional and Urban Economics, Volume 4, edited by J. Vernon Henderson and Jacques-François Thisse, to be published by North-Holland. We are grateful to the editors, Masa Fujita, Mike Peters, and the participants at the the 2002 narsa meetings for comments and suggestions.