City of Dreams

Bigger cities offer more valuable experiences and opportunities in exchange for higher housing costs. While higher-ability workers benefit more from bigger cities, they are not more likely to move to one. Our model of urban sorting by workers with heterogeneous self-confidence and ability suggests flawed self-assessment is partly to blame. Analysis of the National Longitudinal Survey of Youth 1979 data shows that, consistent with our model, young workers with high self-confidence are more likely to locate in a big city initially. For more experienced workers, ability plays a stronger role in determining location choices, but the lasting impact of earlier choices dampens their incentives to move.