Agglomeration, search frictions and growth of cities in developing economies

We study agglomeration economies from a dynamic search-matching perspective to account for the growth of cities in developing economies. Agglomeration economies are not only the cause but also the consequence of migratory inflows. Without frictions, however, agglomeration economies as a labor-pull factor will attract workers instantaneously to a region, which is inconsistent with the data. We argue that agglomeration benefits combined with search and additional frictions (e.g., fixed costs and imperfect recognition of the benefits) can generate a transitory endogenous growth path that is consistent with the set of empirical regularities observed over the economic development process: gradual rural-to-urban migration and the resulting urban concentration, productivity improvement, urban unemployment, and wage and unemployment gaps across regions, which diminish with economic development. We also characterize optimal urbanization and draw some policy implications including the necessity of regulating urban concentration. Copyright Springer-Verlag Berlin Heidelberg 2015