A Model of Sequential City Growth

Strong evidence indicates that in most countries cities tend to develop sequentially, with the initially largest cities growing first. This paper presents a model of city growth that rationalizes this pattern. Increasing returns to scale constitute the force that favors agglomeration of resources in a city, and convex costs associated with the stock of installed capital represent the congestion force that limits city size. The key to generating sequential city growth is the assumption of irreversible investment in physical capital. As expected, the presence of a positive external effect of aggregate city capital on individual firms makes the competitive equilibrium inefficient.