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Agglomeration Elasticities and Firm Heterogeneity

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  • Daniel J. Graham
  • David C. Maré

Abstract

This paper estimates the relationship between agglomeration and multi factor productivity at the one digit industry level and by region using longitudinal firm level data for New Zealand. A key focus of the paper is on methods to represent firm level heterogeneity and non-random sorting of firms. The panel structure of the data allows us to control for it at the level of local industries or enterprises. We obtain a cross-sectional agglomeration elasticity of 0.171, which falls by 70% when we use local industry controls, and by 90% when we impose enterprise fixed effects. Using industry specific production functions, we find that the "within local industry" estimates are similar, though slightly larger than the cross sectional estimates (~0.070), suggesting negative sorting between areas, combined with positive sorting within areas. The within-enterprise estimates yield a small elasticity of 0.010. Our results indicate that the imposition of a common production technology across all industries is not a valid assumption. While cross-sectional estimates may overstate the true impact of agglomeration on productivity in the presence of positive bias from sorting, the within enterprise approach (which is increasingly common in the literature) can suffer from identification problems due to the highly persistent nature of agglomeration variables and may understate the true causal effect of agglomeration on productivity. We thus rely on the "within local industry" estimates as providing the most reliable indication of agglomeration elasticities.

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Bibliographic Info

Paper provided by Spatial Economics Research Centre, LSE in its series SERC Discussion Papers with number 0043.

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Date of creation: Feb 2010
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Handle: RePEc:cep:sercdp:0043

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Web page: http://www.spatialeconomics.ac.uk/SERC/publications/default.asp

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Keywords: Agglomeration; urban density; productivity;

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  1. Jofre-Monseny, Jordi & Marín-López, Raquel & Viladecans-Marsal, Elisabet, 2011. "The mechanisms of agglomeration: Evidence from the effect of inter-industry relations on the location of new firms," Journal of Urban Economics, Elsevier, vol. 70(2-3), pages 61-74, September.
  2. Williamson, John & Paling, Richard & Staheli, Ramon & Waite, David, 2008. "Assessing Agglomeration Impacts in Auckland: Phase 2," Occasional Papers 08/6, Ministry of Economic Development, New Zealand.
  3. Ciccone, Antonio & Hall, Robert E, 1996. "Productivity and the Density of Economic Activity," American Economic Review, American Economic Association, vol. 86(1), pages 54-70, March.
  4. Combes, Pierre-Philippe & Duranton, Gilles & Gobillon, Laurent & Roux, Sébastien, 2008. "Estimating Agglomeration Economies with History, Geology, and Worker Effects," CEPR Discussion Papers 6728, C.E.P.R. Discussion Papers.
  5. George S Olley & Ariel Pakes, 1992. "The Dynamics Of Productivity In The Telecommunications Equipment Industry," Working Papers 92-2, Center for Economic Studies, U.S. Census Bureau.
  6. Glenn Ellison & Edward L. Glaeser & William R. Kerr, 2007. "What Causes Industry Agglomeration? Evidence from Coagglomeration Patterns," Harvard Business School Working Papers 07-064, Harvard Business School.
  7. Henry G. Overman & Diego Puga, 2008. "Labour pooling as a source of agglomeration: an empirical investigation," LSE Research Online Documents on Economics 33149, London School of Economics and Political Science, LSE Library.
  8. Ackerberg, Daniel & Caves, Kevin & Frazer, Garth, 2006. "Structural identification of production functions," MPRA Paper 38349, University Library of Munich, Germany.
  9. Z, Griliches & Jacques Mairesse, 1997. "Production Functions : The Search for Identification," Working Papers 97-30, Centre de Recherche en Economie et Statistique.
  10. Wooldridge, Jeffrey M., 2009. "On estimating firm-level production functions using proxy variables to control for unobservables," Economics Letters, Elsevier, vol. 104(3), pages 112-114, September.
  11. Maré, David, 2008. "Labour Productivity in Auckland Firms," Occasional Papers 08/9, Ministry of Economic Development, New Zealand.
  12. Rosenthal, Stuart S. & Strange, William C., 2008. "The attenuation of human capital spillovers," Journal of Urban Economics, Elsevier, vol. 64(2), pages 373-389, September.
  13. Zvi Griliches & Jerry A. Hausman, 1984. "Errors in Variables in Panel Data," NBER Technical Working Papers 0037, National Bureau of Economic Research, Inc.
  14. David C. Maré & Daniel J. Graham, 2009. "Agglomeration Elasticities in New Zealand," Working Papers 09_06, Motu Economic and Public Policy Research.
  15. Duranton, Gilles & Puga, Diego, 2004. "Micro-foundations of urban agglomeration economies," Handbook of Regional and Urban Economics, in: J. V. Henderson & J. F. Thisse (ed.), Handbook of Regional and Urban Economics, edition 1, volume 4, chapter 48, pages 2063-2117 Elsevier.
  16. Melo, Patricia C. & Graham, Daniel J. & Noland, Robert B., 2009. "A meta-analysis of estimates of urban agglomeration economies," Regional Science and Urban Economics, Elsevier, vol. 39(3), pages 332-342, May.
  17. Combes, Pierre-Philippe & Duranton, Gilles & Gobillon, Laurent, 2008. "Spatial wage disparities: Sorting matters!," Journal of Urban Economics, Elsevier, vol. 63(2), pages 723-742, March.
  18. Di Addario, Sabrina & Patacchini, Eleonora, 2008. "Wages and the City. Evidence from Italy," Labour Economics, Elsevier, vol. 15(5), pages 1040-1061, October.
  19. Daniel Graham & H. Kim, 2008. "An empirical analytical framework for agglomeration economies," The Annals of Regional Science, Springer, vol. 42(2), pages 267-289, June.
  20. Williamson, John & Paling, Richard & Waite, David, 2008. "Assessing Agglomeration Impacts in Auckland: Phase 1," Occasional Papers 08/5, Ministry of Economic Development, New Zealand.
  21. Daniel Graham & Kurt Dender, 2011. "Estimating the agglomeration benefits of transport investments: some tests for stability," Transportation, Springer, vol. 38(3), pages 409-426, May.
  22. Christensen, Laurits R & Jorgenson, Dale W & Lau, Lawrence J, 1973. "Transcendental Logarithmic Production Frontiers," The Review of Economics and Statistics, MIT Press, vol. 55(1), pages 28-45, February.
  23. Rosenthal, Stuart S. & Strange, William C., 2004. "Evidence on the nature and sources of agglomeration economies," Handbook of Regional and Urban Economics, in: J. V. Henderson & J. F. Thisse (ed.), Handbook of Regional and Urban Economics, edition 1, volume 4, chapter 49, pages 2119-2171 Elsevier.
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Cited by:
  1. Gábor Békés & Péter Harasztosi, 2010. "Agglomeration Premium and Trading Activity of Firms," CeFiG Working Papers 11, Center for Firms in the Global Economy, revised 28 Jan 2010.
  2. Daniel Graham & Kurt Dender, 2011. "Estimating the agglomeration benefits of transport investments: some tests for stability," Transportation, Springer, vol. 38(3), pages 409-426, May.

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