REGIONAL SPECIALIZATION, URBAN HIERARCHY, AND COMMUTING COSTS∗

We consider an economic geography model of a new genre: All firms and workers are mobile and their agglomeration within a city generates costs through competition on a housing market. In the case of two sectors, contrasted patterns arise.When one good is perfectly mobile, the corresponding industry is partially dispersed whereas the other is agglomerated, thus showing regional specialization. When one sector supplies a nontradeable consumption good, this sector is more agglomerated than the other. The corresponding equilibrium involves an urban hierarchy in that a larger array of varieties of the two goods is produced within the same city.