A Note on City Size and the Sharing of Quasi-Rent between Labor and Capital in China

We use an asymmetric Nash bargaining model between worker and firms, under the assumption of firm-specific human capital (FSHC), to argue that city size influences the proportion of the rent received by labor (i.e., the magnitude of labor share of rent). We argue that an increase in city size generates both a positive effect (the “FSHC-autonomy effect”) on the bargaining power of labor as well as a negative effect (the division-of-labor effect) on the bargaining power of labor. Our empirical exploration found that labor share of the rent (in percent) increases with city size, suggesting that the FSHC-autonomy effect is greater than the division of labor effect.