From Sectoral to Functional Urban Specialization

We document and then develop a model explaining and relating changes in firms’ organization 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 specialize by sector and host integrated headquarters and production plants, to a configuration where cities specialize 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.