Working Paper

Structural Change, Urban Congestion, and the End of Growth

Volker Grossmann
CESifo, Munich, 2011

CESifo Working Paper No. 3626

This paper develops a two-sector R&D-based growth model with congestion effects from increasing urban population density. We show that endogenous technological progress causes structural change if there are positive productivity spillovers from the modern to the traditional sector and Engel’s law holds. In turn, urban congestion effects cause a productivity slowdown in the modern sector. Eventually, economic growth may cease in the long-run. We also show that land dilution from a higher workforce may give rise to negative scale effects on GDP per capita. Finally, we investigate how the optimal land allocation depends on the strength of urban congestion effects.

CESifo Category
Fiscal Policy, Macroeconomics and Growth
Keywords: congestion, endogenous growth, Engel's law, structural change, urbanization
JEL Classification: O100, O300, O400