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Agglomeration Economies, Productivity, and Quality Upgrading

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  • SAITO Hisamitsu
  • MATSUURA Toshiyuki

Abstract

Empirical studies on agglomeration have focused on the identification of its productivity-enhancement effects. A reduction in marginal costs due to agglomeration economies increases the operating profit of firms, which enables them to employ more inputs to produce higher-quality products. This study examines such effects of agglomeration on product quality by using plant-product-level data for Japanese manufacturing. Empirical findings confirm that product quality increases with the market size of regions, suggesting that agglomeration-inducing polices are effective for increasing firms' profits by improving both productivity and product quality. Stated differently, our results indicate that the benefits of agglomeration on profits are underestimated in previous studies by ignoring its contribution to quality upgrading.

Suggested Citation

  • SAITO Hisamitsu & MATSUURA Toshiyuki, 2016. "Agglomeration Economies, Productivity, and Quality Upgrading," Discussion papers 16085, Research Institute of Economy, Trade and Industry (RIETI).
  • Handle: RePEc:eti:dpaper:16085
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