High productivity in cities creates an economic surplus relative to other areas. How is this divided between workers and landowners? Simple models with homogenous labour suggest that it accrues largely-or entirely-in the form of land rents. This article shows that heterogeneity of labour in two main dimensions (productivity differentials and housing demands) radically changes this result. Even a modest amount of heterogeneity can drive the land share of surplus down to two-thirds or lower, as high productivity and/ or low housing demand individuals receive large utility gains. It follows that land value appreciation understates the value of urban amenities and infrastructure. In a system of cities the sorting of workers across cities means that, while total rent is highest, the rent share of surplus is lowest in the largest and most productive cities. ? The Author(s) (2018). Published by Oxford University Press. All rights reserved.

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1 May 2018

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Journal of Economic Geography 18(3) , pp.523-538, 2018

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DOI: 10.1093/jeg/lbx043

http://academic.oup.com/joeg/article-pdf/18/3/523/24814769/lbx043.pdf

This Journal article is published under the centre's Urban programme.