Cities are divided into local governments responsible for local commuting infrastructure that is used by both their residents and outsiders. In this paper, I study how metropolitan fragmentation affects the provision of commuting infrastructure and the distribution of economic activity. I develop a quantitative spatial model in which municipalities compete for residents and workers by investing in commuting infrastructure to maximize net land value in their jurisdictions. In equilibrium, relative to a central metropolitan planner, municipalities underinvest in areas near their boundaries and overinvest in core areas away from the boundary. Infrastructure investment in fragmented cities results in higher cross-jurisdiction commuting costs, more dispersed employment, and more polycentric patterns of economic activity. Estimating the model using data from Santiago, Chile, I find substantial gains from centralizing investment decisions. Centralization increases aggregate infrastructure investment and population. More importantly, for a given amount of investment, centralization yields large welfare gains due solely to more efficient infrastructure allocation.
We study how bank branches' local market power in interest-rate setting and frictions in the interbank market lead to misallocation of investment across cities. Using loan-level data from Chile, we document interest rate differences both across cities within the same bank and between banks within the same city, consistent with the theoretical mechanisms we propose. We develop a quantitative spatial model with banks that allows us to quantify the impact of the bank network on spatial inequality. Preliminary analysis indicates that pro-competitive reforms in the banking sector increase aggregate welfare by 1.63% and lead to significant reductions in spatial inequality.
Presented at (by coauthor or myself): 12th European Meeting of the Urban Economics Association