Econometrica: Nov 2012, Volume 80, Issue 6

The Productivity Advantages of Large Cities: Distinguishing Agglomeration From Firm Selection

DOI: 10.3982/ECTA8442
p. 2543-2594

Pierre‐Philippe Combes, Gilles Duranton, Laurent Gobillon, Diego Puga, Sébastien Roux

Firms are more productive, on average, in larger cities. Two main explanations have been offered: firm selection (larger cities toughen competition, allowing only the most productive to survive) and agglomeration economies (larger cities promote interactions that increase productivity), possibly reinforced by localized natural advantage. To distinguish between them, we nest a generalized version of a tractable firm selection model and a standard model of agglomeration. Stronger selection in larger cities left‐truncates the productivity distribution, whereas stronger agglomeration right‐shifts and dilates the distribution. Using this prediction, French establishment‐level data, and a new quantile approach, we show that firm selection cannot explain spatial productivity differences. This result holds across sectors, city size thresholds, establishment samples, and area definitions.

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Supplemental Material

Supplement to "The Productivity Advantages of Large Cities: Distinguishing Agglomeration from Firm Selection"

This document contains a set of appendices with supplemental material.  Appendix E extends the model to introduce worker mobility, consumption amenities, and urban crowding costs.  Appendix F derives asymptotic properties of the estimator.  Appendix G explains how we compute the minimisation criterium to estimate the values of the parameters.  Appendix H provides further details on the data.  Appendix I explains how we implement alternative approaches to estimate TFP.  Finally, Appendix J provides sector-level estimates using urban areas as spatial units.

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Supplement to "The Productivity Advantages of Large Cities: Distinguishing Agglomeration from Firm Selection"

This zip file contains the replication files for the manuscript.

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