Skill, Agglomeration, and Inequality in the Spatial Economy

This paper develops a spatial equilibrium model with skill heterogeneity and endogenous agglomeration to study distributional welfare consequences of spatial policies. I show empirically that the relationship between log worker productivity and log city population is nonlinear in city size and in worker's skill. The model predicts these nonlinearities through local idea exchange between workers. I structurally estimate the model to match US Census employment and wage data, and use the estimates for decomposition and counterfactual exercises. A policy, with zero aggregate welfare effect, that favors smaller cities at the expense of larger cities, would notably reduce welfare inequality.