Income Disparity, Time Allocation, and Social Welfare in a System of Cities

The objective of this paper is to examine the formation of specialized cities with multiple types of households in a decentralized system of cities. This is done in a two-sector spatial general-equilibrium model of a closed economy consisting of two groups of labor forces: a continuum of unskilled labor used to produce a food product, and a continuum of skilled labor used in the production of a high-tech product. Cities are formed in this model as a result of investment in public infrastructure. This investment leads to a reduction in commuting cost and consequently to an increase in the time that households can utilize for work and leisure. The paper characterizes the equilibrium solution for a purely specialized system of cities and presents some comparative static results. Moreover, the paper presents an explanation for the variation in city sizes as a result of differences in households' value of time. Finally, the paper analyzes the determinants of income disparity between the two different types of cities and its impacts on social welfare.