[R&R at Review of Economic Studies]
Cities are often divided into local governments, each responsible for their local commuting infrastructure used by local residents, workers, and outsiders. This paper examines how metropolitan fragmentation impacts the provision of commuting infrastructure and the spatial 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 within their jurisdictions. In equilibrium, relative to a metropolitan planner, municipalities underinvest in areas near their boundaries and overinvest in areas away from the boundary. Central municipalities tend to underinvest more, as higher commuting costs encourage households to move closer to where they work, thereby increasing land values in central areas. Decentralized investment results in higher cross-jurisdiction commuting costs, more dispersed employment, and more polycentric patterns of economic activity. I estimate the model using data from Santiago, Chile, and find substantial gains from centralizing investment decisions. Centralization allocates infrastructure more efficiently and increases aggregate expenditure on infrastructure.
Using detailed loan-level data from Chile, we document significant geographic differences in interest rates for firm loans. Firms in cities with high borrowing costs pay around 280 basis points more than firms in low-cost cities. While these estimates account for differences in firm and loan characteristics across cities, we find evidence that they are related to the level of concentration in the local loan market. We examine the pass-through of monetary policy to lending rates and find that banks with higher local market shares exhibit stronger pass-through, aligning with models of oligopolistic branch competition.
We study how capital flows across cities are shaped by the spatial distribution of bank branches. Using data from Chile, we show that banks that experience regional deposit shocks increase lending in all cities relative to non-exposed banks, indicating a limited role for the interbank market. We develop a novel quantitative spatial model with oligopolistic banks and frictions in the interbank market. Using the quantified version of the model, we find that interbank frictions generate productivity costs of 2.7% of GDP, while market power plays a larger role. Bank mergers improve financial integration across cities at the cost of reduced competition in the banking industry. The welfare effects of mergers range between -5.7% and +0.6%, depending on the geographic footprint of the merging banks.