51st Congress of the European Regional Science Association: "New Challenges for European Regions and Urban Areas in a Globalised World", 30 August - 3 September 2011, Barcelona, Spain
The goal of this paper is to link models of urban formations (urban studies) with models of housing rent. While housing market models are essentially static, model of urban formation is presented in dynamic set up. The driving force for dynamics comes from migration theory and includes chain migration model. In economics and social studies, we often observe collective phenomena that produce externality effects and that cannot be described by classical market theory. On one hand, we observe mass migration to urban agglomerations despite congestion effect. On the other hand, we observe such phenomena as housing bubbles that can lead to huge macroeconomic consequences (like financial crisis of 2008 driven by explosion of the US bubble, or contemporary recession of Spain also driven by housing bubble). Migration has rational and chain components. Due to chain effect, migration inflow will be positive and high when city passes its optimal level. Housing price and construction sector will both grow at this stage although utility of citizens already decline. Thus, chain migration is de-stabilizer of the economy and one of sources for bubble emergence. Combination of city dynamics with the static theory of urban and housing economics makes it necessary to understand the issue of ownership in land rent. This is a complex collective phenomenon with externalities.