# **1 Introduction**

Over the past two centuries, the world has witnessed unprecedented changes in the form of massive population growth, continuous urbanization, and economic development. With the advent of the Industrial Revolution (1760-1840), countries in Western Europe and North America began to shift from agrarian towards industrialized societies. This involved migration from rural areas to cities, which, combined with a decline in urban mortality, caused urban populations to grow at an unprecedented pace. As a result, urbanization rates began to pick up steadily. The proportion of people residing in cities increased dramatically over that period, starting from a low rate of approximately one-tenth throughout the Middle Ages and the early modern period (Bairoch 1988) and reaching today 81.5 percent in North America and 73.4 percent in Europe (United Nations, 2014). Simultaneously, North America and Western Europe experienced unprecedented economic development as urbanization accompanied a profound structural transformation of their economies whereby employment in the agricultural sector decreased and a large manufacturing sector emerged in cities (Bairoch and Goertz 1986, Michaels et al. 2012). At the same time, declining transport costs facilitated trade between cities, which further stimulated industrial growth. To the extent that cities also facilitated innovation, in particular through dynamic knowledge and human capital externalities (Lucas 1988, Romer 1990, Glaeser et al. 1992, Black and Henderson 1999, Bertinelli and Black 2004), it is fair to say that they acted as engines of growth (Henderson 2005 and 2010, Quigley 2009). The dynamics of urbanization both stimulated and were accelerated by economic development. Urban population growth contributed to increase labor productivity (and thus income) thanks to pervasive and significant agglomeration effects whereby workers become more productive when cities become larger (Duranton, 2014a). This positive relation is represented on the cross-sectional graph plotting per capita GDP against the urbanization rate for 189 countries (see Figure 1, Panel A below). In accordance with this graph, it is roughly estimated that a one percentage point increase in the urbanization rate is associated with a five point increase in per capita gross domestic product (see Duranton 2014b). A similar relation emerges when plotting U.N. estimates of per capita production for a cross section of large cities against the corresponding country’s urbanization rate (see Figure 1, Panel B below). The latter graph suggests that cities tend to be more productive in countries which are more urbanized.

Several authors contend that these evolutions in the cities of Western Europe and North America were made possible by the emergence of institutions conducive to economic growth (North 1990 and 1991, Chong and Calder ́on 2000), such as financial development (Bondenhorm and Cuberes 2010), the degree of democratization (Henderson and Wang 2007), and property rights (Acemoglu et al. 2005). Improvement in land property rights, in particular, played a crucial role as it favored the development of manufacturing activities by lowering transaction costs for the transfer of land to the emerging industries that were locating in cities and by making investments not only more secure but also more productive (Knack and Keefer 1995). By stimulating the development of 2