[NBER TECHNICAL WORKING PAPER SERIES Roland Benabou ‘Technical Working Paper No. 113 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue ‘Canbriage, ¥A. 02138 ‘October 1991 May 1991; Revised July 18, 1991, I am grateful to Olivier Blanchard, Patrick Bolton, Peter Diancna, Oliver Hart, John Beaton, Jerzy Rothenberg, Jean Tirole, William Wheaton and especially dulso Rotesberg for helpful comments. All errors are Fy ow. This paper is part of NBER's research program in Taxation. Any’ opinions expressed are those of the author and not those of the National Bureau of Economic Research.NBER Technical Working Paper #133 Detever 1991 WoRKINGS OF A CITY: LOCATION, EDUCATION, "AND PRODUCTION anszmact, lWe examine the implications of local externalities in hunan capital investment for the size and conposition of the productive labor force. The model Links residential choice, skills acquisition, and production in a city composed of several communities. Peer effects induce self-segregation by occupation, whereas efficiency may require identical communities, ven when some asymmetry is optimal, equilibrium segregation can cause entire *ghettos* to drop out of the labor force. Underemployment is more extensive, the easier it is for high-skill workers to isolate thenselves from others. When perfect segregation is feasible, individual incentives to pursue it are self-defesting, land lead instead to a shutdown of the productive sector. Roland Benabou Department of Economics Canbriage, ma 02339 fang NBERare eaves fg tncone and occupational Lines, People wich igh shLLL, high wage Jobs Live together im cercatn select areas or suburbs, and chore with Jow eki2, lov wage fobs, or no Job at all, reside tn ateferene pares, This reparation 4 tuscatned essentially by étfterenttals on the price of housing betusen the two types of communities ‘This steuation, which has becone accentuated in recent years, te often Geplored on grounds of inequity (e.g. Releh, (2891), But there Le also 4s Implicit clate of tneffietency: occupational or income regcegation te sald to deprive some communities of the chance to acquire even aodert levels of skitle land thereby to adversely {apace the overall quality of the Laber force Moreover, {t te argued, this underuttiization of human resources has or vill eventually have negative repercussions on the ecandard of Living of the hgh sk12 clase steel -although through which channels 4s rerely articulated Tole paper atcempts co address sone of these tesues, by forualtzing the Links between residential chotce, occupattonal choice, and production in a efty coaposed of several coumun{ties. In doing £0, {¢ relaces ewe strands of work Jocal public finance on the one hand, and the scroeconoie literature on hasan capteal and ski11 acquisieton on the other. with the former 4 shares « conceen for che Lnpact of community comporition (peer group effects) on the provision of public goods, parcteularly education. ULeh che Latcer St shares the ale te explain endogenous, aelf-replicating dlseribuctone of skt22e and incoaes ‘Te local public ftnance and club theory Liserature hat emphasized the way tn which peer effects aittgate the standard Tiethout (1956) efftetency motive for agence to coslerce into communities of homogeneous preferences. erglas (2976) oxtginalty shoved how couplesentarisy in production skills interacts with heterogeneity of taster, resulting in eixed communtetee (1988) and Seoteheer (1991) demonstrate that peer effects have sinter ‘ences of wenbership fees. Aznote and Rowse (1887) coupuce the optimal school Bervolone (1990) analyzes the Lneffieseney which results vhen dlacriafnatery fees axe not available, and shovs bow 4 a central planner can use # tax on ‘educational expendivures az 4 second-best tnetrument. Finally, Schwab ané losces (1990) provide relacad resules in a sore general freneverie sud to these papers, in particular to Bexeles (1976) and Be Bartolone (1990). But £t also departe from thie Literature in several Saportant ways, Firat, {© examines the interaction of Local and global externalities, respectively peer group effects at the community level nd competition in a cityovide Labor market. Hest fundanentally, 1 rejects the standard atuaption of an exogenously given Atetribution of agente wich different ebilicies or tastes, Instead, che overall d{atributton of types (professtonal cecupations) Ls deterained ie ‘equilibrius, together with the composition of Local communities. aie reflects 4 conviction chat the dfzeribution of “abilisteat or "akill ‘sn the (natfonal) population should be explained rather than assuned, because of Aes central imporcence not only for local community ceapesition, but alse for macrotconoole productivity and grovch, Moreover, eapiricel studies show ‘hat among the young's characteristics most relevant for thelr ovm and thelr et achiev * 8, endogenous fanily attributes such az parents! education, occupation and incone play 4 prontnent role. So for a model of human capital 1 affects to be internally consietent, the young’s aistribution of abilicies (the new snput into che education process) aust reflect thedistribution of skills acquired by their patente (the previous output of the education proceas). Uhat eust be exp Foreplicating Atatethuttane of ektDLs, and the factors vhteh shape thea. Ie fe through this precccupetion that the paper relates to recent werk on the detereination of the level and cistribucion of Income. For Lnstance tn Loury (QMEL), Gal-OF and Zola (1989) oF Banerfee and Newnan (1990), (2991) ee acquisition of hunen capital o ekitls tx an fnvestuent which ts tapeded by cradle market inperfections, tequeste therefore Mink together the oceupattonal chotces and corresponding ineores of succorsive generations; in the long-run, ey state, self-sustaining distribution of ektlle and sncose ts reached Wate privately purchased inputs to education and vealth constraints are undoubtedly tuportant considerations, this Literature CL, but allows Me te em che high-sklll wage wy > wy, ‘The deterninante of vy. vy, Gy And Gy Axe exanlned Belov. The high and tov ek{11 occupations could alse be called white collar and blue collar, or srial and Line production Jats, Por etaplicity, uttlity Ls additively a Hevtict vate et 4 and cf are the wage and effort level corresponding to the cecupattonal choice of agent {, x the rent which he pays, and af any \4dittonal incoue vhich he aight receive (from land ownership and hose production); for an unemployed worker, vt = ct = 0, at =v, The city: These agents can either Live tn the cfty or remain outaie -in the countryside or other efttes; the Latter choice ylelds the reservation uclltty v corresponding to being out of the Inbor force. The city is separated im ceo, ony by river, On ich elde (Bast and West) {9 @ total nuaber 8/2 of Andivietbie Land plete, suitable for eccupation by one‘ Andtvidual or faaily. Each of hese plots belongs to 4 Landowner who wil recetve a competitively detesained rent, in che muneraize geod. Landomere con be viewed ax a separace group of M agents who eoneune but do not work, and have uctiiey given by (1). Equivalently, each of the N workers could ovn & A Susssnalities tn occupations] chaise: We assume chat agents choosing to becoue igh-ski1 vorkese confer poestive externalities on others within che sunity (East of Wert) who pursue the esse oscupstion, as vell es on those vio becone low-aktlt workers, Fo Ay, cy and Care decreesing functions of the fraction x of Andividuals {9 the community vho ere investing fn igh skinis.? For tnatance fo. « Mgh achecl, the more students vork hard vith the aim of cing te college, the lose che individual effore requixed by any of then; but a the less the effort requied to finish Mgh-rchoot by « etudene vho will ‘not be going £0 college. OF 1¢ could be, as in Banerjee and Besley (1990), that a higher proportion of hard-corkers, By agking grades more informative of Individual abiity, increases everyone's incentive to work hard. Another exanple, now fnvelving adulte, 2 that of social networks (Mentgounery (1990)): knowing an eetabltshed worker spectally at the aanagertal Level we 2 the co of gesting any type of Job. That person can alse serve az role model. Finelly, an aleernative interpretation {2 that unesployed and low-skill workers (or siven fection of thes) tapes rogative externalities on thels community («6 isruptive influence, crime), These last three effects are consistent with Crane's (1991) findings char high-echool drop-out and ceen-age pregnancy rater are significantly affected by che proportion of adults holding managertal or professional jobs in the neighborhoodWe shall make he eportant astunption “which 12 strongly suggested by hese examples: chat the axcernality decresses the cost of acquistng Mah 4 the cost of Becoming low-skilled, In other Words, thore who decide co fnvest in high akills are more sensitive to the ‘eccupattonat choice of these peers than those vho opt for low skitle.? Assuaption Al: The cost functions Gy(x) and c,(x) are both decreesing, with 2068) = Cyl = GUC) posteive and decreasing tn x This soreing condition, reflected by « steeper elope in ELgure i, vill cause self. eregation of worker ‘ypee, since those choosing high ekile vttl be willing €0 bid gore for land in & community vith more of thetr ove endogenous) types." Since vorkert vith high skills earn higher wages, we see that yet another Suportant interpretation of Assumpcton 1 fs that of & pecuntary of fLecal extemallty: the wodel’s baste properties would remain unchanged 1f the argument of Cy and G), were the consuntty’s average labor. ‘sncome instead of x Standard education production functLons fnciude sh cypes of vartebier: individual characteristics, purchased inpute, and peer effects, our technology Mighighes the ehird Kind, and co some extent exbodtes che second fone in reduced fora.5 Te provides the simplese setting in which to eacnstrate the Ampact of local externalities on the eakeup and producttvtey fof the labor force, In practice, Ldloryncracte factors are alco ‘sportant (eegresstons for educetionel achlevenent have Large unexplained resiuals), and wIlL inceract with the effects which we Leclate here Under astusption Al, che sore people cheose the Migh-kt21 occupation, the Rover the costs Gy(x) and C(x) for chose 4m thelr community. Iatuttivety, fone vould £2411 expect # comuntty’s total educations! cotema ent. G0 Go 4,0) x propor ction vo. pureue Bigh skills,2) ex) = e.cyOD + 0.2460) AL fraduetion: In contrast to skill acguisteton, whitch takes place at the coumuntty level, production takes place at the cftyowide level for tnatance, tn an Aaland on the river. Sharing common labor and product markets 4e in fact vhac makes communities pare of the sane netropelie, rather chen sere Atafoinged eketes. ‘TLe interaction of Lecal and globel externalities Le at Workers from both coamuntts are enployed Am conpecitive flrme which produce he mumeratre good, using 4 constant returne to scale technology FULL) = @.E0,L), wien a2e/01? < 0, a%eyaut <0, a*f/aHaL > 0, and Oa productivity paranoter. The veges wy © 3F(H,L)/Ell and m= SF(H,L)/3L earned ‘sn each occupation therefore do not depend on where the worker Lives, but only on the cfty-wtde proportion W/L of the exo types of Labor. To ensure that both Kings of aber chee the net incentive to become a Aigh-skill rather than 4 Low-sk6lL worker te positive when here are very fev high-skill workers, and vice-verss Asgumncdon AD: Lim (mv )(4.2-8) ~ (Gy-6,)600) > 0 Ye, [oye G2-0) 0; (11) fn a comunkty vere 44 fraction x of the workers have high skill ch of them derives eux) etftctency untts of Labor from his endowment, vile each Lov-ekill worker derives 6104); (LLL) eyG2) and 6,68) are doen increasing, DUE g(a) has a Intgher elasticity. This aleernstive aedel has very slatlar properties to the formulation described above: che Latter {4 someunat more conventent because of the separebilicy beeween wager an¢ eftort,7 ‘_Qverlanning genecacions and dante externalicies For sone of the externalities which Assumption Al ie aeant to capture, partieulerly those related to education, the stmultaneity of cccupations] chotce, peer effects and residential chotce may seen unreclistic. It is sostly adults who éateraine the qualtty and rerources of the communities in Walch childcen ake thelr sie ments in education. To see that our analysts ‘enconpatses such intergenerationsl effects, consider the following aodel Individuals Live evo periods, When young, they choose level of busan taunt, putting tn effort levels 0, CLixje)s oF Cylnye)s MEE Aye 4 the proportion of igh-ekilie adults in thetr native conmunity J. then adult, they reap the corresponding returns: wLMestbeen)s oF MulHesnolegn?s HBOre Heys Leg, ave the total munbers who chose hgh end 2ow ‘kL2e when young. Ae adults they also decide in vntch conmuntty k to rats hele offspring. Being altvuletic, they care (additively) nat only about therent rye, Bue alee about thee child's incextenporal uttltty, and tn perctoular on his oF her educational opportuntty set, which depend on tyes uF Ghat the steady-stazes of ehte dynante model cotneide up fo a dtecoune factor on wages and renee, with the equilibela of our kode? Xr = avecrareo cry equrcaparon We stare by Looking for an equilitriue vhere both co wintttes axe ‘Hdentical, This 4s « useful benchaark, for two reatons, Pret, {¢ coreesponds fevctly co the case of a ctey which Ls integrated, 4.4, composed of « single winkty or sharing group. Second, in o subdivided efey Le remains an (unstable) equtlibriua, where Location plays no role, So by using te ar can barter Asolate the specific effecty of mobtlicy and self-segregation A. foullibriue: Lee us ftrse consider che cate where all gente are enployed, Wich {dencieal comuntetes (ox « single global community), they muse all be indifferent between the ev occupations, Se if & Ls the high-skill fractton of the Labor force: OO opmpGasd = eeaye Since sultiple equtlibrie arising from the complenentarities desertbed tn fssunpeion AL are not che focur of our Snterest, we shall rule thes out: Aemmnton AD: (oye) (IL) ~ (Cy-e DOH) fe decreasing tn x Tis condition holds Af productivity @ Le high enough; (3) then has wuntgue solution, which constitutes a squlltbetun of the integrated clty 1 mts find work preferable eo unemployment:tunmiten sd: Fe wpht-t) - G8) v0 Chearty £ ts an increasing function of produceivity @; moreover, # increases in &, 40 Al ts aatisfied Lf cechnology £2 productive enough. Finally, the Lend sarket cleare when workare ane indifferent between Living, in oF out of the efty. Eessosition J; Under ateuaptions AL-AG, there te «unique ay Sncepeated, ful) exploysent equitibetun. 4 fraction £ of Inigh level of ahilte, where: gv(Z,1-2) = acc: the land rene te &. he the other extreme fron ehie full employment equiltbrfue, there aay cxtst « trivial equilibrius where no ont works, oF eguivalensly where the ofty fails to materialise, Ip this case there also extets an unstable equilibrium © porn ene with parctal uneaployzent in betv aquiltnete generate zero surplus or rents: they represent coordination fallures in an integrated efty, and have nothing to de vith location, We shall ignore them from here on Ascuspchone AL to Al vill be they wil be Aaplieit én all proporitions, 2 RetLclenes: The equiliertur of Propesicion 1 Le cheraccorized by the ae individuals acquiring high skills are ot revarded for the benefits vhich they confer on ochers, Indead, denoting aggregave surplus by VO = FGe,1-x) = 62), ve have: o VEG) = -B.Ghe) ~ 81.6408) > 0. ‘Tie inetfietency Sn the vorkforee's composition does not describe anything nov; nor te t related co lection, The more interesting Lssue, to Which we row turn, As whether ‘© 42 Saproved of vorsened in che sepregeted egutlibrtun11x - stonzcarep equrtzans0m 1 etey, mere neighborhood effects on. Our purpese 48 not fo account for all segregation or rent differentials; che aodel abetracce ft sources, auch as hecerogenetty in castes over public services, cransportetion costs, oF land consuaption, It concentrates instead on hov £4 Adenetal and Inunan capital deciatons shape one another, and on theft long-run iaplicattene for che surplus generated by « tty ‘A. ZaulLibriun conditions ‘An equtltbriun contiate of wages, community cosposttions and land ents eich clear beth Labor and Land sarkets: fleas maxieize profice, and no vance to change occupations comunttins, or Leave the etty Formally, denote the proportions of high skit, low ski1 and unesployed workers tn mintey $= 2,2 a8 (xy.3 ny yg) the ocher community te enoeed by -J, The rents are ry and x.y. The cocal Mgh#kill workforce te then M+ ay + x2, and the lovesitll workforce L= yy + yp. te « nonceetvtal elu, we must have for each J 4a) osenattonal choice: HAE Kye yy =O, MyAity ~ GLO) s¥, MLL) = G,(0) 5 v. FA yy > ay = 0, myGL) « Gyloy ses HOHE) - oLC0> PAE yD yy = 8, MOLLY - Guin BE HOLL - Gyeay) FAL ayy > 0, MCLE = Gylay) = HOLD ~ cee) Bw, wich equality $6 xy + yy <2. 0) onsite: Tae CMLL) = GYOR) = ve HLL) = Gyo) =v, 0ate Leer fet of conditions for Living tn conmuntty 4.9 Equiv ently, these are the rente whch wake people indifferent between Living in any comunity and Living outeiée the efty hence a Jo indifferent betwen communities), Nove that 4 community J t¢ net fully eaployed, or equivalently, £4 partially enpty (xy + ¥y <1), then Fy = 0. Rather than present & taxonoey of all possible equilibrium configurations, ve shall. ignore parasecer values which allow unemployed and Lov-skitled workers co coextet ine communtty (0 < yy < Len), and focus Instead on evo pereteularly interesting polar cases, The fier one (Section TIT.) obtains hen in equilibrium, everyone se{l1 wants to work. The size of che labor force te therefore not an Larue, Due only L¢¢ skill comporteton, and how effietencly thts mix te achieved through the geographical allocation of workers. The second cate (Section T11,D) {2 that vhere « coxplecely unemployed “ghetto conscdtuting « downright waste of productive resources: To encuse that lov shill work fs alvaye preferred to unemployaent, the required effort must not be too Large, even in « community deprived of the excornalitien conferred by workers acquiring hgh skille, Thts requires « econger version of sassaptdon ad: ¥1 66,255) > E40) ++ This condition holds 4f technology {= productive enough, ax long ax 60) <0. Mext, fo rule out an uninteresting multiplicity of equilibria, ve shall eed to etrenghten ersuapcion AD co: weummcton A: Py FL) Cxytng,2emy-%2) = (CyCy) Gy) fe decreasing tn xy, for ait xy fo (0.1),u Tie expranston {4 the ner sncentive to eusteh from lov £9 high akiiLe ween the skilled Labor force already includes « fraction x; of one’s ovn community, plus a fraction x) of the other coamuntty.10 We are now randy co characterize the (non-trivial) equilibria of che Adenctty equilibria whteh are mirror taages of one another vhen community 1 fa relabelied a4 community 2 and vice-versa, Communtcy 1 (she Hest efde) can therefore be taken to alvaye have che most high-eki] workers: x, 2 2 consider first the case where both sides are mixed: 0 < xy 54 <1. This equtres 26(xy) = Oe(H.L) = 86(%q), £0 Hy = xy = 8, By Aland Ad. The only tolutton Ae che ayanetric allocation characterized tn section II, and stustraced on the Left panel of gure 2. Since communities are {dentical, 20 dare rence, and there {4 no Teaton co aove; Ms situation ts eetll an equlllbetun Te 4a, hovever, unstable: soon as xy becones slightly Larger than xp, community 1 becomes nore attractive to all workers: {es rent tnereases, with che land going to che highest bidders. Bur the Latter are clearly the workers vho want to favest fn high skills, stnce they value noving to conounity 1 more than the others do, Le. Cy(xg) - GyCxy) > 61042) G(x). $0 additional sktited workers aove to the West side, making {t even re attractive and iner sing ry + rp further, until the stable, segregated ‘equilibrium te reached:1 Heasonition 2: Atrune AS and AS. There Ls «nique stable aquilfbriue, which tvolves aexteal concentration of high-sKi3] workers: (1) 165 6/8, att ntgrestth workers are concentrate in community 2, sd hate Catal aber Sn increased by aobiliey: fy > 2.5, ents ace Oe Bye LE + GO) < wy BAD = CURD =Ma ‘Higuce 2: Putt amptoynene egutatbeten Intastaced squidibrtus (unseabie) Binus 2a £32 Higura 2b: 8 > 1/2 Sexeaated cavihibeion (eeable) ryeey = 6400)-¢,48) een = Gulia) Cyd)1s (1 Tf >1/2, 11 Low-akL2] vorkere are concenteated in conmuntey 2 apd che tora munber of hyh-#kiN1 workare te deers br movtttey: + fe ee eet 06 y= wylhiga doi) = Gylkgd < wyttaty 1) + Gy) = (LD) There Le a range of par for which the equtlibriun Reaaf: in appendix ‘The ineutcion for these rerults can be sost sinply understood as follove Scareing from the unstable eynsetrte configuration (vith proportions 4 and 16K of high and lowsskLIL workers on each side), « perturbation leads nore fod nore Mgh-#kll2 workers & her in communtey 1, unekt ether: (4) all of ‘chem have regrouped there (2.5 5 1, Eiguce 2.4); (11) oF they have f11ed up the Gest side completely and sont of then have to Live on the bast atée, vith the loveskiIl individuals (2.2 > 1, Elguse 2.b), In etcher case, thts be fot yet che equilibriue, because these migrations affect the Incentives for cccupational choice, Since xy har fncreased, 1¢ {¢ now easter to attain high skis fa 6 ntty 1. Hence tn che ELeAE cane, fone sarginal agente tn commonity 1 will wake het chotce, and ve end up with iy > 2.5 higheaett, workers, In the second ease, 6: uintey 1 ts alvendy full wien Righ-aktIt typees he marginal agent is tn conmuntty 2, viich her experienced a érain of Iigh-ak(ll workers, Since the cost differenttel a(x) workers will becose Iighly skilleg, until the va adetereneial evcaing, 2 n7xp) has risen enough to compensate for the tncrease io 4C. Thue the etty- vide population of skilled workers must decline: 1+ % < 2.5 When % te around 1/2, che eve effects described above Le coopletely segregated equthfbriun, fe. i = 1, %g.= 0.12 this te becauseacquiting high-shille {4 very cary for the Tare few workers in a community Workers tn # community where no one elas fx doing Lt Finally, ££ 48 shown tn appendix that assumption Aé precludes any stable ‘oqullibetun veh unesploynent, except of course che pty ebty™ equtltbesan cEetictency We nov examine the efficiency properties of the market outcome, by couparing 4 to a planser's solution, An allocation is a Pareto optima if and only Af se maximizes cho utility of the representative agent (including Landowners), f.4. th per capita surplus V of output over educational o raining cores (effort):19 ©) WO annetzing) = Flayeag. ry) = Gun LOD + RaGylea) = Yae6L09) + voy yyeay) Over Hye Yu and Lexgeyy tm [0,1], 4 = 1,2. Re can also write: ooo YEP Gh Gap Me GL Gey fo that V- v is the gun of all Iand rents, We focus on the cate vhese the planner wants the whole Iabor force to work. Fronacktion 3: If productivity © 42 high enough, the planner chooses full ‘expleynene. Peak: $n appendix, The tncuttion 42 chet «I than fully exployed community does not Produce any surplus; then 4£ 6 ts high enough, the susplus from the other community 4 show to be less than £, which can be genecated by # fullysaployed city. Hance, for # productive enough economy, the planner‘ problem Hapliftes to choosing the skill compostcion of each community's Labor force, and her objeceive function £6: )— Voxyeag) = Foyt: Pompe) = AO) = #62) ‘The problen Le separable into finding che geographical allocation which che cont of achieving any given proporsion x/(2-x) of high-#kil1 workers, and shen finding che value of this xacko which maxtnises surplus: Qf BFGtA) an OD + eI mt oO Mrether Ae Ls optinal to bunch Nix/2 high-ekill workers together or spread then out evenly depends on whecher @ # concave oF convex, Tals in cum fon the Ancerplay of tvo effects, On one hand is the greater seneteivity of high-akill workers to communtey composition, wich tenda to make ‘@ concave (and produces bunching in equiltbriva). On the other, che benefits confered to efther type by @ marginal Righ-#b{li worker in the communtey aay be decreasing. For natance, Henderson, Mleskovsky and Sauvegenu (1976) find significant concavity in the effects of mean et sbtliey on a seudene’ educational achtevenent: Dynarslt, Schwab and Zampell{ (1969) find chat greater income dispersion, ceteris paribus, raises « school élscriet < average & performance. The case vhere the agglomeration of Mgh-#kill workers Savolver private econoaies but soctal diseconostes Se thus of particular interest (Section 111.0, hovever, vill relax thls sumption) Acsumation Al: A community's educational ea 82) = x.0yGR) + L90-GU02) fare convex in the proportion of Andividuale acquiring high #k{lls.ry Aesumptton A? requires that there be © atteces yufftedene eurvacure An p ‘compared to che differenctal sensitivity affect of assumption Al: £¢ meane Ehae GYOD + GL) + x.G400 + Cax).6fG He Aneensing tn x, oF GG) + LD. > -2.66q = GD") for add xt Resnasition 4: If productivity ts hgh enough end A7 holds, che planners probles hes unique solution, whieh {4 eymnetrie: in each community, « fraction x# of individuals acquire Mph-ekill Levels, vere 8) GEFEN IA) © Gyre DON = A-g)OH + Cox) che) <0 Reuaf! tn appendte, ‘he overall proportion of hégh-skill workers {x of course chosen 0 thet the net social benefie of training an additional one 4 zero. As to thelr geographical distribution, the rei thet @ marginel worker choosing high skilla 42 euch nore beneficial tn a conemnity where there are few like Me chan fo one where they axe alceady abundant: although -Cj(2) > -C{(2) for all x, -j(xy) < -6f64p) hen ny ts sufttctencty larger chan xy.25 A simple exanple aah his transparent: let technology be Leentietf, requiring both types of Labor in unit proportions. The only faaue 4a then che cost of training thts Labor fores. With all high-skill workers on one elds fend all those with lov sk411 on the other, 16 48 Cy(l) + (0) Colmes 6/2); 1F both sides have che same atx of skills, 1€ t9 0y(1/2) + O1(1/2). thts ferrongenent As nore effietent ££ 6,(0) ~ G1(1/2) > Cy1/2) ~ Cy), meaning thet G(s) Ae steeper at lover values of x than Gy(x) a= high values We can now summarise how self-segregacion affects welfare(1) Af 6 te conven, 4 creates an additional ineffletency wich respect ee the symmetric equilibrium, nasely an exe ively high cost of educating the Labor force, (LU) tee tepact on the undertnvestaent problem (2 < x") 44 more asigueus At brings above Leprovenent in communities where high-ski1l workers concentrate, but deterforation in these which they desere, The net effect depends on wheehar che co nt mixed Just after segregation wuntty whieh occurs hee expertenced an inflow or an outflow of high-skill workers: 3 + Sb 2b en rbr 8a, or S2an The results for # < 1/2 have one noteworthy consequence; even when che Hlrstobest As symetete, tmpostng symmetry (eay, of adults) vithout at the 6 cine subsldtzing high ekills (for children) wey actuslly lover welfare ‘D.Unensloysent egullthelun We now turn tos caze where the attempt by the high-sktll group to separate steel€ has nore drastle consequences than before; instead of only affecting the composition of the Labor force, 4 alse reduces ite size, resuleing tn tele hhunan resources, Moreover, this atteapt will be shown to be self-defeating, in sense specified below We do not make any convexity estusption on educational costs &, but siaply replace exsuapcion AS by Acgumtion AB! 41(6,1) < 6,10) + w. This means that ic ts diffteute (but not necessarily sapossttle) to acquire low skills without exporure to cose Migh-skill wotkere in the community, Recall that J 4s an upper bound on eh factor eatho H/L im any egutitbetue, so ehee +1) = wyG.1) fe an upper bound on the Low-skt2l wage.1s Plesce 2: Onenploynant eqettthcian note peaVe nov derive the equilibriun, lat us start again from the unereble symmetric equtlibrtum, assuming for now that # < 1/2; Bigs d. when the Nf/2 Megheaktll workers of the Eas aide sove to the Vest aide, Se acquire even a low level of rkille; the cost exceeds the revard, £0 they drop ‘out of the productive sector, fut ehte Le not che end of the atory: since th rsber of lov-skill workers has been drastically reduced, thetr wage ris ‘Tks reduces the incentive for worker {n community 3 to become skilled: hance ess of than do 0, neil the Labor market clears, Since the Labor market {6 equllthrfun W/L must be the ane as {0 was in the incegraced equtlfbriun, {.« 0-8): and surplus, despite the fact that the initial proportions (2.4, 162.8) in 0 Elgure 2 atin. Te and resule 44 a halving of production community 1 made acquiring high skills relatively easy, Prosezition 5: Arne AS and AB. Then: (4) 1 -5.1/2, ehere Se « untque stable equilibria, Mobinity reduces: the productive labor force by half, with ite skill composition unchanged: coumunity 1 st421 hes proportions & and 1. of high end low-skitl workers, but all of community 2 renain unproductive, Rente are: 0-1 < f= 1p (1) 105 > 1/2, cate atlocatton renal ovber possible stable eguilibriun 42 the full-empleysene allocation derived sn Proposition 2 (Li). Te te indeed an equilibrium 46 and only ££ w(14ig,1-59) 1 66k) + v. tm all cases, che coral number of high-skitl workers decreases Rook! tn appends.a ‘he result Sn the case £5 1/2 stands in shacp contrast to the elution of Proposteion 2, vhare workers in comuntty 2 remeined ployed wien tow. skills. There, concenerating the Migh-aklll workers allowed an tnorease in hele number H, and « decreare in thelr wage: {© now leads to « reduction in het munber, with unchanged wage, Then Le Le also very diftezent fron het vould obeatn fn 4 model with exogenously given types of agents, euch a6 jargles (1976), De Bartolose (1990) oF Schad and Oates (1990). Ineutetvely, each skilled worker vho moves or ataye avny from community 2 coneribucer co deprive all bis peers (and Misgei) from & conplenentery kaput rely Lov-skII1 production workers; thls in turn reduces the deasnd for Ris feacing* flight An Section 20 The second we In Proposition $ te algo quite tntuttive. Conetder the full enpleyaent allocation % = 1, Sp solving sv(24ig,1-i) = Aclig), as described tn Proposition 2 (41). Ie {a 4 stable equilibrive ££ 2 b+ Mah enough thee wp (Lip, ig) & Cy65g) + v.16 16 not, full-employsent 12 not suscainable and sone agente evitch from lovesktll work to insctivity..7 reducing the high-low wage gap, this induces others to eviteh from high to low skille; thes do corn makes ecquiring lowskitle sore aifficuls, and ents ‘unravelling continues neil coumuntty 2 40 igure apatn, ote finally that: (4) 4a contrast to the full expleysent case, ¥ aleaye wp completely unesployed. see declines; (LH) when & 5 1/2 oF w(l4ig),1-9)) < GLC)? +, mebLALLy worsens ‘the Inefficiency of the integrated allocation, whether ox not @ 4 convex Tor tnacence when 45 concave, the planner vould alse kapleaent an eeyanetcie ‘atocatton; but unlike the market, she would provide workers in conmunicy 2 with auetictent incentives to remiin in the Labor force in epice of the highThe preceding sections derived and compares the equilibria of an sntegrated efey and that of 4 6 wusption of ee comunkties 2 etty. The wevhat arbitrary. Moreover, che issue of vhether the Woole high-skill labor force of the integrated equtlibeiun could regsoup into 4 single community (@ % 1/2) played en taportant role in shaping the ‘To chow chat che baste insights are quite robust, ve derive in thts eectton 4 related rezule which holds for any number of communities, end is tnvartant eo the value of 8, Moreover, {x atkes strikingly clear that the degree to eich a elty “works" (Jn boeh senses of the corm) may be inversely related to she feastbélicy of sagregacion Suppose chat the city te divided into m communteles of equal size W/x,8 The rameter a mesures hov effectively groupe of agents can eegregate themtelver from others; 12 1y reflect technological constraints euch as & intmur efficent community aie resulting fron fined costs, or institutional ones such sehook Gteerleting or az zoning lave, We shell apply the reasoning of Section II1.D to this aore finely partitioned city We start on Eiguze 4.8 fron the ayenecric, full enploynent equilsbetun, wich £.8/m Aigh-#kill vorkers in each community, Ae urual, ft ts unstable since high-skili-workers will attenpt to regroup inte honogenous communities Clearly, a ctable aqut2ibriun ean have at moat one stxed conmunity, fe. wich a proportion 0 < xy <1 of high-skill workers, Moreover, eny coamuntty without Aigh skills 4s fully uneaployed: since H/L ie still bounded by 3, investing tn lov skills pays at gore w(,1) < 61(0) 4 v (by AB), and Se therefore noe worth the effort, Ag # rerult, there Le at aost one communityts aeg}usaes fur ansfus weglas weghes wales aefes a2 =|. vaforafocafoa}ua = Wn Wa We We We We We2 containing lev-ek(11 workers (and high-ekLll workers), and U1, 0} conmanittes containing only Mgh-rkiIl workers; see Eigure 4.) Ue have chem: Responition 6: Aesume AL, As the ability to segregate, measured by a. tnereares, the pi cepts productive labor force, output and surplus in any sable eguldshetun remain bounded by: wea, HM < 57m, o FOLD CFG, OMAR < FGI = GO) ‘Thus the “phactot affect {deneit ‘extensive, the easter Le 45 for chore seeking £0 become Migh-#kill verkere to taolate themselves from thelr lov-sk{11 counterparee, Their individual incentives co secede ere self-defeating, preventing sost ef thes in eguilibeiua from achteving the occupation they seek. In che Lntt where perfect segregation f+ & ible, As pursule leads tnazeed co « coral shutdown of the productive sector. Az urual this 42 a ateady-state outcone, which aay bbe reached only over the course of several generations mts én ce veeule 42 of course a reflection of our very simple model due se howe most el rly the destructive potential of residential self ation in the presence of externalities in human capital tov sone coent Moreover, 4¢ 4 guive robust In particular, 4 dose not require that the planer want to achteve equal being (ehe Wil {£ educational corte @ axe conven). Nor does the elata of Inefficiency even require that the planner want full enployment (ehe will Lf 6 4s high enough): the planner can alvays genezate the por capita surplus £> 0 corresponding to the tymmetric, full-euploysent equilibrium, whereas thelatssez-fatre surplus becomes arbitrertly anal]. O€ coures the loss froa solf-sagregetion tneree 1 cechnology © becomes more productive ‘The result alae doce not require char {¢ be tapcestble to acquire tov icilte shen no Mgh-skil] vorkere ate around, Just costly enough. Finally, © does not require that either type of Labor be easential co production, only chat the elasticity of substitution » be fimtce, For # given a, of course the size and coaporttion of the eustainable productive sector dapend on 29 tn reality, clties contain more chan one occupationally mixed communtty sure of mixed to fully homogencous conmuntties; ths ir really how 1/a should be interpreted. Note that sndsvtdual ents eesking co become Migh-skill workers will alvays ery £0 achieve aecinel segregation ~ ERIENSIONS AND RELATED ISSUES. hile we focused on a single cfty, our aodel of how the Labor force te shaped by locel externalities extends to che Level of the country. Since the stabie etty equtlibriun 4 unique and giver Labor ite reserustion uetitty, he nettonal equitibrius ateply conslaze of replications of the represencacive xy eabody Local variations in E4ctors which tapact produceive surplus, such as technology of the extent of relf-sepregation, and result Ln asgterene Land rent mneacive efty, segre elon {2 sustained in egutlibrivn by potentially lar rene differentials; these in curn can be charged by landowners conountty size ix inelastic. An upward-sloping supply curve for land in each community, of the porsibilicy of Living tn « azeller plo, wilt alleviace angregation and Ser Sapact on efflctency. But this vill come at the cost of distortions in land uttlization, as the-more highly2 skied community vill use more Land or have higher population density considerations which may be enpirloally relevant, One tz heterogeneity of abilities and tastes: as wencioned eatlLer, this ealesion 44 intentional, to co explain how neighborhood affects shape the labor force, or even the axiatence of unemployed "ghectes", The other eatesion 4s dysanten. our generations model vhere adults choose location, recognizing ther their children’s educactonal opportunities will be atfecced by conmunte Af residential chotce 4x haspared by wealth constraints or tnceracts ¥Lth other tohertees ct ectertatics, the Tong-run equlltbetun 20 ‘Another Laportent Lssue {4 that of competition betveen communities and local tenation. Since land rents in each community extract all surplus from che reeidente, the landowners of comaunkties where high-akill vorkers congregate are better off; the others should therefore ery to bid avay che sence vho engage in this wore valuable sccupation, provided they can be Adeneified, Even then, restoring optinalisy through decentralized taxes and substi ‘eieeioute: « pure ateategy equilibrium mey not extst, Because 7 by deviaeing and offering « 11ttle more to thore who puriue Mgh-rkills, a community ean attract @ Lerge musber of thew: moreover, 4e neglects any tapsct chia migne nave on tne overait labor force, These 1esues relate to clu theory, but the conbination of peer affecce and taperfect competition hes not toed tn che Lcerature; nor har the end enous aLetribution of fypee1 Loury (1977) represents a sotermedtate case, where Blacks and Whites have Adenticel innate abilities but the cost of acquiring skills Se assumed to epond on the relacive sneose the eve groupe 2 ae Situscraced by the examplez belov, the relevane notion of “eomunity" te ‘he group oF ares within which this effect operetan, and thus depends on the lity under consideration. Ve meke the conentent susption thet each comunity extends over half the efty; ¢ will be relaxed fn Section 1 3 sw'e (1978) finding that high and lov ability students in grade choot benef equally from peer group smproven segregation 0 eaerge {8 that Cj-cj be even slightly positive, Moreover fnducing affect, auch as a differential sensisivity of high and Low-ski11 fnvestownts co educattonsl expenditures, tn the spirit of De Barcolone (190) In sy oh (1978) soprepetton, te. « honogensous city, resules from sergtoup externalitics") ox king ee ow (*postsive Ancragroup externalities"). Hare, everyone benefice from nigh-ekil1 workers but ochore eveking Mgh aktile Denefit gost, Al aise aiftere frou De Bartolone (2990), where high ‘peer effects than low-ability types: on the other hand, they care nore about fedveattonal expendieurs Finally, both previous sodeLs involve fixed populations of exogenous types. 5 16 expenatere on education has a higher marginal tapact on the cost of Mgherki1L dnvesement than on that of low ak{2L fnvestaent, © will be an sing function of x. The & SE chitazen's education hat @ consumption value vhich sneres os vith parents’ Level ofn ski11e oF sneone © Regutring people co work vhere they ruside, az in Berglas (1976), vould ‘amply wake 611 communities {dentleal go the integrated elty examined in section 2 ay thts alternative vers fon, Labor Ancome 4s eesidence-dependent: ta community J, Mylo) = aula) -APOLLI/EH, wp) = ey(0y).AFCLLI/2L , vaere BA = ay ceying) + ageeytngd and LAE = (Long) eyo) + (ag) e189) © the zero-esployuone equllibriun (e.e.¢,) eccuts when the a jence of gh both factors’ opportunity cost too Régh for fLzns co sopley then profitably. Formally, for any pair of wages (oy.e1), let pleyitr) denote flrs’ cost-minintzing factor ratio, and Alay) the corresponding marginal cost; the z.e.e, exists (f and only 4 p(Gy(@)1¥, 6,(0)+¥) > 2. In his case there 1s also a unique part{al enployaent ogulltbriun (p.e.e.), vith X. y. xAy A (0.1) solving: seg) [HED = GOOD 1) paceoner. eLo4) = a/9y ver en ae oa Geeyedens henry = 1] the equivalence ts by definition of ¢ and A. Indeed, for the full-eapleyment 1-8). 468,189) ‘equilsbetin, by (2) and (AD: ACCyCRIV, CL CEIHY) < AOAC TL Therefore, chere ts « unique ¥ ¢ (0.8), such chee Mey(F)ev, oLC)+N) = 1. Moreover, J = S/o(Gyl)e, O(R)40) < 1K, oF else aeCR.1-5) ¥ acl), 20 eR by (45), « comtradiccion. Hence the result, Ploalty, while the 2.0.6 4s clearly stable, the pee. 4s seddlepcint-unstable, since the Jacobten: $6 Prey Aryan? bas a negative decerninent ° As Gn Wheaton (1977), aaker rente are the outer enveloppe of bid rents 29 ctven thee 824/201 > 0, assumption AD then holds « forttort NM Fetiowing the Literature (e.g. Miyse (1878), the faplicte adjustoene2 procese in this paper te one of standard tatonnement; e4e che proof of Fropestcion 2, Forslizing « dynamic rational expectations equilibrium vich ‘cccupational coxposttions as Je vartables would complicate the aodel, but eave steedy-stace results unchanged. Also, while stability arprents are convenient to focut on a single equilibrium, all ehe results could be restated 4s comms of ow the 265 of equlltbeia ts affected by self-segregetton, 12 changes in £ may reflect changes 4m producetvity @, of in the cost “ateferenttat aC. Tn partteular, £2 1/2 a @.(ypwpp(.d) @ cc/2) 22 jan agents are ex-ante Ldentical, After choosing thetr occupettons they yy be considered different, bur uetlity renaing cransferable, as éncone 16 por instance with FAL) = 0.8.19 and Cyt) = ey Cano, £2 Hh Ly b> 1, ete requtzes: o/2 > (ta Ceq/ey -D. 1S suptar effects axe dicuared by De Bertotone (1990) and Schwab ond Oates rece they also interact with ehe overall camposteeion of the labor force 26 Ag usual, betveen this equilibrium and chat vith xz = 327 0, chere ts chen en unstable one vhete community 2 4s parttetly eaployed. AT gy paethoular, ££ v6.2) < G21) + v, ful empleynent f= not eusestnable, stnce W/L sj end ig 528-1 18 wexnoue 1 1 of generality, 4 will be conventens here €2 think of agents ‘as forning « continuun vith aeasure N, x0 that = can take any value 29 For instance, #f FHL) = ofan + (2-ap tM), then f= (o/G-2))%, $0 AE a/(l-a) > 2, maximal eaployment 4 higher -and wore skeved coward igh skill worker the Bigher 4 ¢; but 1f o/(l-a) <1, « higher ‘stieity actustly contributes to sbrinking production. 20 oury (1972) cbtains avch « dependence on Antetal conditions vhen the relotive incono of reciel groups affects the coat of acquiring skills.» sareces Arnott, Ry and Rovee, R, (1887) °F ‘Ateatwenent", Journal of Public Esonaniss, 32, p. 287-208. 5 Group EEfecte and Educational Banerjee, A. and Besley. T. (1990) “Peer Group Externalities and Learning Teeentiver: A Theory of Nerd Behavior", Princeton University W.P. No. 68 anerjee, A. ané Newnan, (1992) ‘Occupational Chote an the Process of Developaent Mineo, Februsry Local Public Goods", Journal af Fublic Eeonantes, 6, p. 609-425 1. (1976) “Déstribucton of Taster end Skille and the Provisten of Bruschner, J. and Lee, K. ‘Club Theory Bich A Feex Group BEfact* (1988) Replonsl Science ant Urban Eeonsnice, 19, p. 399-020 (crane, J, (1991) "The Epléente Theory of chettos", gnetican Journal af Sectalasy, March De Bartotone, C. (1990), *Equtlturtun and Ineftseteney in A Coomuntty Mode? with Peer Group Effects", Journal of Paliticsl Zeonony, 9 Bynarekd, M., Sehvab, R., and Zenpell4, E, (1968) “Local characteristics Public Production: The Care of Education", Journal of Urhan Economics Calor, 0. and zetza, 3. (1989) “Income Dlstrtbution and Hecrecconoatcs* ‘row University Working Paper No, 69-25, ou Es, MatLal, M, Schetskaen, J. and Schlatter, A. (1950) *¢rovth tn Ghetess, university of tte nV. Mleskoushy, F., and Sauvegeeu, Y. (1976) “Beer Group Effects and Educational Production Fuscetons™, Journal of Public Reonantes, 20x0 ougnan, P, (1891) "Increasing Returns and Eeonoale Geography", forthconing Journal of PoLitten) teonowy. Lowry, 6. (1981) * Tncergenesatlonal Teanafere and the Dlatetbutton of earnings", Econometrica, vol. 49, 4, p. 845-867 Loury, 6. (1977) "A Dynante Theory of Rackal Income Differences", fn A. Le ond (eds) ‘Manen. Minorities and Eoslownent Digcrimtnation®, Lextngson tiyao, T.(1978) *Bynanse Instability of « Mined Chey tn che Presence of etghboshood Externalities", Anerican Economic Review, 68, p. 656-069 Mentgeanery, 4, (1980) *Soctal Networks and Perstatent Inequality fn the Labor vacket*, Northwestern University 2 Peroces, R. (2990) *Polttteal Equllibriun, Income Distribution, and Groveh winso, Decesber Reich, R. (1991) "Se won of the Suscessful", Naw York Tines, Jenuery, p. 16-17, p. 4205 1, (1990) "Conmuntey Composteton and Local Public Goods: ‘A Noraative Analysis", University of Maryland mines, July. Scotchaer, $, (1991) "Public Goods and The Invistble Mand", UC. Berkeley Working Peper No. 177, April Sumuers, A. and Wolfe, B. (1997) *Do Schools Make « DLfte Kconoaic Review, 67, p. 639-652 nee 7", neriean ‘Ruouue, A: (2990) “meron Study of Great Brlealnt, MIT alaeo, Novesber, ‘Hhethout (1956) °A Pure Theory of Locel Expendicures", Journal of Bolistcal Eeonany, 64, p. 416-426 \wueacon, ¥, (1977) * Bid Rene Approach to Housing Denand", Journal of Urban Heonsnice. 4, p, 200-217a arrevoxe Roof of Eropesition 2 We tree shov that the symnetrte allocation {a unstable, Indeed, 16 te recap 2-H) ~ Agu CHD) Coad = [eaenn inca) = age! whore Jacoblan at (2,8) te Ay ween co aante -2c'(8) > 0 as an ‘etgenvalue arsoctated to the elgenvector (1,-1). Since (1,1) correspends to changes in the geographical allocation ef # Labor force with constant occupational composition, ve cen call thts inetabliity “locational” We now turn to segreneted equilibria, Recall chat by AS, #6") = Benen’ 2oxext) » 86(a) Le decreasing in x, for all x! Lfullsaslovseat equilibria: In the text ve showed thar the only auéh equlibetum with xj > 0, x; > 0 var the ayoneeric, unstable allocation ‘Tecetore, Sm a stable equilibriue, one of the folloving must hold (A) only community 1 te mixed: 0 = xy 0, Feat, since v(t) < a6(0), 0 > W(O.1) > Yox.2) for alt x; hence there can be no equtlibriue of type (11), Two ca ace possible (2) 4E A6(2) = B0CR) < ACCL/2), hen $OL.O) > YL,0) > 0 for AIL x <1, and che unique egullsbrium {2 of type (444), with (1,0) > ¥(0.1) (6) AE av(a) < 26(2), than 91,0) <0 < ¥C2R,O) hence Ehere te a unique ye (28,2) euch Whee ¥G%,0) = 0, deftotng a untqu oqutlibetun, of type (1D ase 2: bul) > ECO/2), Le, $> 1/2, Mote Eee WRAL) = auCaE,2- 28) = wo(2R-1) = ac(£)~ a6(28-2) <0, First, since av(t) > Ac(d), 62.0) & 91.0) > 0 for all x: hence there can be no egutlibrtum of type (1) two cases are posesbie 0) $£ 66(0) & w(t) > B0(1/2), chen ¥Ox,3) ¢ WO,2) + 0 for all x, and the nique equilibrium 6 of ype (LLL), wlth #(1,0) > (0,2) (b) 4£ av) > 20(0) khan 9(0,1) > 0 > ¥(28-1,2); hence there te a unique Ey € (O,28-1) auch that ¥OEg 1) = 0, Te dating the untque equttbriun, viteh 4s of type (20).2 tnenslevnent ecutLibris: Ke new show hat ne euch (stable) eguiltbrlue exlate, except possibly for one where nobody works, Given assumptions Al. Iigh-aktI1 works OIL always ourbid Loveaid12 vorkere, and the 1 alvays outbid uneaployed agents, for any avatlable Land in community 1 Gas]: TE Mgh-rkil1 agents are on both sides, they aust £121 up conmuntey 2 completely: #0 xp = 1, 0.< xp say yp <1. But then W/L = (Long)/yp > (1g) /Clomg) > Ly Ou > MLD > LCE, 2-8) > GYC0) #4 > CLO) + v By ‘assumption A6, TALS meant chat the unemployed 4m community 1 vould rather acquire low skills, 1 conereetecion Gese 2: TE Righ-rkill agents are in conmuntty 1 only and low ski21 agents ta both, then community 1 can have no unenpleyed agentes 40.0 < xy = yy <1, 0 xp yg Ae Bue chen po He/CeagtyE) © Cxg/(2%2), 9/012), 20 beep /(hoxg)) < acy), Laplying thet xy > K. Therefore wL(A,1) > wplag.2e ma) > Hi(R,2+8) > €1(0) + v, ylelding the cane contradletion, Sess 3: TE high-skill agents are in commnfey 1 only and lov-skill agents in 4 single community, {¢ must be community L alse, Le, 0< ay Recall fret thae the planner can always get f > ¥ by Seplenencing the eyuseerte equtlibriun, Mote also ftom the definteton (3) of & that as @ tuereasos to ¢ *, 8/(1+R) fncreares to a Linke of 3 1 any allocation vbe der consttions for (¢) ny yy <2, ee fea show thas oy = Oya) = 4 HS EHO) + np -cLOY) A, oe WV < Coles = Gale = 2 < CLD = cyt) = v)/2. Boe under constant returns to eeale, and by definition of #2 (mh 29 + 9 1.299/2 © FO/2,1/2) FOELAE) = MEAD = GD. Se Bw myCRARD = Hy 1) + (myRAD + OCD = 2G HCD = 1/2 = [BER 1-8)/6L ~ 86(5,10/2L + BECGLAI/BE] + [6yCA) = 2.640) - vI/2 Nev, a 0 -> #0, che right hand-side becomes equivalent to @.66(5.1)/21. ese 22 LE my <1, than Ov = ACG) + HL Gil) + exp. ch> oa) ‘Terefore H = ¥-< (uL(e.2) = GLC) = ¥)/2 < Cu (eed) ~ GLC) = ¥)/2, #0 Hae 28 = W) > .(2.86/(8,1-8)IL ~ BEC6,19/3L) + OC) » 2.608) = So for 8 Lazge enough, the optimality of V requires 2£(¢,29/8L > 2.888,1-8) [Aw 2.8865,1)/9L, Tobe tn cum requtrer p> f, hence xy > 3/0248) since 9 = (ayn) /(-mgty_) = 2oq/C-mp- now for @ large 128 1D/K = 26 11/2) = im) requires char 8f(p,1)/8H - af(p.1)/3L beos close to sero (as long af @* 4s bounded on (5/(248), 1]. whch we shell darsune), Soe. that f be close cof. This contradtees 2€(9,11/81 > 2.866, /8b ato, reoaf of Proposition & heh @ stekeely conven, minintzing 6(0)¢8(42) over Cay ong) WHEN xy + 99 = x requires xy = 42 = 9/2, for any Os x41, The planner‘s probles thos tmplifies to aaxteizing che stctetly conver function VOa0/2 = Fox,1-#) = €(0) over x Am [0,1]. We have V4 (0) = Bole 10x) £668). C)-(RHD C509, and by AD, Ug UG > 0, Lop WC) © Hg avta.t-a) -AceryaCyC2) < 0 1m any equilibriue with production, W/L < # so vy < ¥y6e.1) sseamption AB then implies that for any coamnity J. if xj = 0 then yy = 0 IE ehere te foll-enploywene egutlibrtun ,{¢ clearly guse be the one described i Proposition 2. hen © < 1/2, this requires xp ~ 0, Bence yg = ©, a contradiction. When & > 1/2, ft Ls defined by the unique solution to be(hegs 1g) = ACG), wien 0 < Sy < 2.81; ete de Andeed an equi sbrtun 46 wp(14ig. Akg) > CLR) 49. Tf not, there Le no full: (#) 1€ xy = 0, chen yy = 0, and only community 1 operates, Under constent returns to scale, Ses equilibria are those of an integrated city, eoaled dom to half-size. He thus taow (see Footnote 5) that the only stable ones snvolve nok (0) 26 xp > 0, residential ceabtitey requires chet x = 1. Thte steuacton ‘vas exanined in the proof of Proposition 2 (case 3) above, viere tc vas shove not to be (oceuparionally) stable oe,