Urban Density and the Substitution of Market Purchases for Home Production

This paper proposes a new microfoundation for the existence of dense urban areas. Proximity between consumers and service providers in dense areas facilitates demand for market services due to a low time cost of purchasing services. Urban residents share the factor inputs used to produce services by purchasing on the market the services that their suburban counterparts produce at home. The model predicts that economic areas of above-average density have above-average labor supply and above-average prices. The paper presents evidence in support of this new explanation. Specifically, residents who live near service establishments supply more time to the labor market, own fewer durables for home production, and pay higher land rents, even conditional on income, transportation time to work, and other covariates.