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CEP discussion paper
From Sectoral To Functional Urban Specialisation
Gilles Duranton and Diego Puga
September 2001
Paper No' CEPDP0511:
Full Paper (pdf)

JEL Classification: R30; L23; R12

Tags: functional specialisation; cities; business services; headquarters

We document and then develop a model explaining and relating changes in firms' organisation and in urban structure. Sharing of business services by headquarters and of sector-specific intermediates by production plants within a city reduces costs, while congestion increases with city size. A fall in the costs of remote management leads to a shift in urban structure, from a configuration where cities specialise by sector and host integrated headquarters and production plants, to a configuration where cities specialise by function, with headquarters from different sectors and business services clustered in a few large cities and production plants from each sector clustered in smaller separate cities.