Foundations of cities

How do people choose work and residence locations when commuting is costly and productivity spillovers, increasing returns to scale, or first nature advantage, reward the concentration of employment. We describe such an equilibrium city in a simple geography populated by agents with heterogenous preferences over workplace–residence pairs. The behavior of equilibrium cities is more complex than previously understood. Heterogeneous location preferences are sufficient for equilibrium centralization of employment and residence. Increasing returns and productivity spillovers can disperse employment. An increase in commuting costs may decentralize residence and employment. Our results shed new light on classical urban economics and are important for our understanding of quantitative spatial models.