# **I. Introduction**

The internal geographies of cities around the world have been dramatically transformed over the last century. Traditional monocentric organization where jobs are concentrated in the Central Business District of cities has been replaced by a variety of decentralized configurations. In this paper, we survey theory and empirical evidence to understand the pattern of urban morphology of jobs and land use within a city. We focus on studying the evolution of a city’s spatial structure, the extent and nature of agglomeration economies and the adjustments in functional specialization of economic centers within cities. Such an investigation is central to answering a range of economic and policy questions on land use, location of jobs, entrepreneurship and innovation, alongside congestion costs. This also has bearing on public policy interventions, such as urban development and taxation policies and transport infrastructure investments.

The theoretical and empirical literature on the spatial distribution of economic activities across cities and regions points to the existence of agglomeration economies, both within sectors (localization economies) and across sectors (urbanization economies) in developed countries and developing countries.<sup>1</sup> Although the distribution of economic activities and jobs within a city has been the focus of a limited set of contributions, nonetheless the literature on the internal structure of cities has made clear that depending on the relative strengths of push and pull factors determining agglomeration, a metropolitan area can take many spatial forms. This includes monocentric, polycentric, and dispersed spatial forms. Theory particularly assigns these push and pull forces in the form of the cost of commuting, population size, cost of congestion and the rate of spatial attenuation of production externalities.<sup>2</sup> Evidence reveals that the forces that drive agglomeration of firms and jobs at a sub‐city level may be quite different from those that drive clustering of activities across different cities. The empirical literature on urban form indicates that most large cities in developed countries have multiple centers. Just as cities prove the existence of agglomeration economies, these multiple nodes of employment within metropolitan areas strongly suggest that agglomeration economies work at different strengths and scopes within a city. The limited research that focuses on smaller spatial scale highlights a series of fundamental issues pertinent to policy makers.<sup>3</sup> These studies elucidate that urban configuration is shaped by the quality and coverage of transport infrastructure and the ensuing cost of commute, population size, proximity to ports, human capital and other inputs critical to production. Most importantly, the literature raises questions on the optimality of allocation of land within a city across residential, commercial and other uses. Our review of economic theory and empirical evidence on how employment clusters and economic specialization emerge suggests that in the presence of externalities, the equilibrium urban form generated by profit maximizing firms is unlikely to be the most efficient spatial structure, often creating a

> 1 For surveys on works across cities, see Duranton and Puga (2004) and for that across regions, see Ottaviano and Thisse (2004). For empirical works on developed countries see Rosenthal and Strange (2004), Henderson (2005), Combes et al. (2011) and that on developing countries see Overman and Venables (2005), Henderson (2010) and Venables (2010)

> 2 See for example Fujita (1988), Lucas and Rossi‐Hansberg (2002), Berliant et al. (2002), Berliant and Wang (2008), Fujita and Ogawa (1982) and Chatterjee and Eyigungor (2014).

> 3 See Picard and Tabuchi (2013) for a study that presents a formal model of urban spatial structure based on a microeconomic foundation of forward and backward linkages as it has been discussed in the framework of new economic geography.

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