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Handbook of Economic Growth by Steven Durlauf, Philippe Aghion

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5.5.1 City Formation and Urban Systems

We now develop a simple model of a system of cities in the tradition of Henderson (1974). Before turning to city creation, we begin by deriving an expression for image built on explicit micro-foundations, following Abdel-Rahman and Fujita (1990). Suppose there are multiple perfectly competitive final sectors, identified by superindex image, each of which produces a homogenous final good that is freely tradable across cities. Final production technology features a constant elasticity of substitution across intermediate ...

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