completely from the question of why households decide to live within a particular jurisdiction. Although we have no satisfactory thleory of urban local government, economists have not been reluctant to propose reforms in existing institutions. Advocates of metropolitan government suggest that decisions must be made at the metropolitan level if externalities are to be internalized and economies of scale realized. Tn contrast, the proponents of decentralization argue that further political fragmentation is required in order to provide greater variety in local public services. The only consensus, if any exists at all, is that present institutions of local government are inefficient. However, nowhere in the literature do we find an explanation of why, in view of this inefficiency, change is so rare. Annexations to the cen-tral city, relatively common at the turn of the century, ceased rather abruptly in most metropolitan areas after 1918. Subdivision of the larger political jurisdictions in our metropolitan areas does not appear at all likely. Thus, it seeins reasonab)le to ask of an adequate theory of metropolitan political economy an answer to the question: why are existing jurisdictional bourndaries so impervious to change? To answer this question we must investigate the impact of local governmental structure not only on allocative efficiency but on the extent of redistribution from rich to poor as well. In a recent study of suburbs in the Philadelphia metropolitan area, Williams, et al. [5] report that, when heavy expenditures were involved, wealthy communities were unwilling to enter into cooperative agreements with less wealthy communities. Only when their wealth was about the same would cities agree to engage in a jointly financed program. Across the United States, proposals for nietro-

This paper defines a general equilibrium model with exchange and club formation. Agents trade multiple private goods widely in the market, can belong to several clubs, and care about the characteristics of the other members of their clubs. The space of agents is a continuum, but clubs are finite. It is shown that (i) competitive equilibria exist, and (ii) the core coincides with the set of equilibrium states. The central subtlety is in modeling club memberships and expressing the notion that membership choices are consistent across the population.

For most people, buying a house is one of the most significant investment decisions of their lifetimes. Economists have mainly focused on the consumption aspects of this process. For example, a typical model in urban economics might frame the decision of where to live as a discrete choice over a bundle of housing and neighborhood attributes such as location, square footage, schooling options, and crime levels. The investment side of the problem has received considerably less attention, a surprising omission since housing assets comprise approximately two-thirds of the average American household’s financial portfolio, serve an important role in saving for retirement and, as has become increasingly apparent, can be quite risky. This paper views housing markets from an asset-pricing perspective, using finance theory to relate the risk premium of a housing asset (the difference between its expected return and the return for a risk-free investment) to its exposure to risk. As usual in finance, what matters for the risk premium of a housing asset is its exposure to systematic risk, not idiosyncratic risk. In our model, there are two forms of systematic risk to which housing assets are exposed: national risk (which is common to houses everywhere) and local risk (which affects all houses within a given metropolitan area, but nowhere else). Houses are said to be of the same type h if they are located in the same metropolitan area and have the same exposure to systematic risk. Our main conclusions are that (1) houses of every type face a common set of risk prices ( for the national risk and m for the local risk specific to metropolitan area m) that, together with appropriate measures of exposure to risk,