URBAN DIVERSITY AND FISCAL DECENTRALIZATION

This paper models national diversity in the range of products as corresponding to diversity in the types of cities in the economy. In exploring the link between urbanization and national economies of scope, the major concern in this paper is regulation and the (in)efficiency of unregulated monopolistic competition. Under what conditions does a first best solution require national vs. only local regulation? Does national intervention help or hurt? What instruments of regulation are required for efficiency? Cities of course are in the business of regulating population and numbers of firms through zoning and licensing. They also offer de facto discretionary lump-sum subsidies, through negotiations on tax assessments, tax holidays, and provision of industrial park facilities. Such regulations and subsidies can be both desired by city residents and Pareto-improving for the whole economy.