Skill-Biased Agglomeration Effects and Amenities: Theory with an Application to Italian Cities

We provide a spatial equilibrium model with skill heterogeneity and then bring the model to data on workers living in Italian cities. Theoretically, we postulate that agglomeration to affect both production and consumption. Moreover, we allow the evaluation of urban amenities to vary across skill-groups. Empirically, we find evidence of a substantial urban rent premium, while we fail to find support for the urban wage premium. These results apply more dramatically to higheducated individuals, who care about the consumption effects of agglomeration disproportionately more than their lesseducated counterparts. We show that urban skilled workers benefit from jobs of higher quality (better working environment; higher consideration received by others) and valuate amenities more (local public goods, such as transportation, health and schooling services; shopping possibilities, and the cultural consumption potentials made possible by the location of cinemas, theaters, and museums).