Tourism, amenities, and welfare in an urban setting

Abstract Using data on Italian cities, we document that over the period of 2001–2011, the number of establishments and employment in some key service industries are positively related to the inflow of tourists. We then build a general equilibrium model of small open cities encompassing these empirical features to study the impact of tourism on endogenous consumption amenities, factors’ allocation across sectors, prices, and welfare. We also study the interplay of exogenous historical amenities, tourism, and residents welfare in a system of two cities. When residents are immobile, they are unambiguously better off when they live in a city with richer historical amenities, and thus more tourists, than the other city. When residents are mobile and their welfare is equalized between cities, the strength of consumption amenities becomes crucial to determine whether they are better off living in an urban system where cities are heterogeneous or similar in terms of historical amenities.