We study the tradeoff between megacities and networks of smaller cities in a model of recombinant growth and endogenous amenities. Three factors are key: local returns to scale in innovation, the housing supply elasticity and the importance of local amenities. Even with global increasing returns, local returns to scale in innovation may be decreasing, making networks more appealing. Inelastic housing supply makes density costlier and may explain why networks are more popular in Europe than the US. Megacities can prevail thanks to amenities if the benefits of scale overwhelm the costs of density. The skilled are more likely to prefer megacities than the unskilled. Megacities may have short-run costs yet improve upon networks in the long run.JEL classification: R10, R58, F15, O18

Should China build mega-cities or a network of linked middle-sized metropolises? Can Europe's mid-sized cities compete with global agglomeration by forging stronger inter-urban links? This paper examines these questions within a model of recombinant growth and endogenous local amenities. Three primary factors determine the trade-off between networks and big cities: local returns to scale in innovation, the elasticity of housing supply, and the importance of local amenities. Even if there are global increasing returns, the returns to local scale in innovation may be decreasing, and that makes networks more appealing than mega-cities. Inelastic housing supply makes it harder to supply more space in dense confines, which perhaps explains why networks are more popular in regulated Europe than in the American Sunbelt. Larger cities can dominate networks because of amenities, as long as the benefits of scale overwhelm the downsides of density. In our framework, the skilled are more likely to prefer mega-cities than the less skilled, and the long-run benefits of either mega-cities or networks may be quite different from the short-run benefits.

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