Optimal Formation of Cities: Policy Considerations

Abstract

Club theoretic analysis of migration between profoundly asymmetric cities shows that centralizedpolicy intervention is necessary to ensure efficient allocation of people between cities. Quantity rationingand equalizing lump sum transfers are compared as the policy instruments of the central government. Theinstruments turn out to be different in their effects on residential allocation and welfare. This is becauselump sum transfers pool up the welfare creating potentials of the cities thus affecting the optimalitycondition. Therefore, lump sum transfers are superior, and they accelerate rather than stabilize the spatialevolution.