UNEQUAL CITIES: self-selection, matching, and the distribution of income

Department of Economics
Dmitriy Pokrovskiy; HSE, Saint-Petersburg

"UNEQUAL CITIES: self-selection, matching,and the distribution of income" is a joint paper with K.Behrens, The Universite du Quebec a Montreal.

We develop a model of a city populated by heterogeneous agents. Agents self-select into entrepreneurship, and entrepreneurs set up firms which hire workers. We characterize the equilibrium matching between firms and workers, as well as the within-city assignment of agents to locations. We then explore the implications of city size and the characteristics of the underlying skill distribution for selection into entrepreneurship, rent gradients, and city-wide inequality in disposable incomes. We also derive several testable predictions and confront them with the data.

Image: Tsim Sha Tsui East, Hong Kong, wikimedia.org