Search and Zipf: A model of Frictional Spatial Equilibrium

This paper proposes a theory of cities based on a general equilibrium search and matching model where heterogeneous firms and workers continuously decide where to locate within a set of imperfectly connected local labor markets and engage in wage bargaining using both local and remote match opportunities as threat points. The model allows us to introduce the structural origins of workers’ sorting, firms’ selection and matching-based agglomeration economies into a unified framework and discuss their relationship with the city size distribution. Simulations show that power laws in city size do not require increasing returns to scale in matching or production, but may simply result from the combination of imperfect labor mobility, positive assortative matching between labor and capital, and agglomeration economies in the matching between workers and firms. By-products include sufficient statistics to identify sorting and agglomeration using city-level variation and a rationale for the geographic diversity of urban networks.