Formation of Hub Cities: Transportation Cost Advantage and Population Agglomeration

Abstract

Many cities are located on rivers or coasts. Such cities developed as transportation hubs or markets for interregional trade, since these locations provide better access to other regions. Local products are collected at such hubs, and interregional trade then takes place among these transportation hubs. As the volume of trade between hubs increases, more workers are needed in order to meet labor demand for shipping and handling commodities, resulting in population agglomeration at such hubs. Formalizing the mechanism described above, this paper constructs a simple three location general equilibrium model, in which transportation hubs and population agglomeration emerge endogenously.

Keywords: Hub city, endogenous city formation, spatial general equilibrium, labor demand in transportation sector, constant returns to scale, perfect competition

JEL Classification: R12