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Macroeconomic implications of agglomeration

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  • Morris A. Davis
  • Jonas D. M. Fisher
  • Toni M. Whited

Abstract

The authors construct a dynamic general equilibrium model of cities and use it to estimate the effect of local agglomeration on per capita consumption growth. Agglomeration affects growth through the density of economic activity: higher production per unit of land raises local productivity. Firms take productivity as given; produce using a technology that has constant returns in developed land, capital, and labor; and accumulate land and capital. If land prices are rising, as they are empirically, firms economize on land. This behavior increases density and contributes to growth. They use a panel of U.S. cities and our model's predicted relationship among wages, output prices, housing rents, and labor quality to estimate the net effect of agglomeration on local wages. The impact of agglomeration on the level of wages is estimated to be 2 percent. Combined with their model and observed increases in land prices, this estimate implies that agglomeration raises per capita consumption growth by 10 percent.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Chicago in its series Working Paper Series with number WP-2010-02.

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Date of creation: 2010
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Handle: RePEc:fip:fedhwp:wp-2010-02

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Keywords: Macroeconomics ; Consumption (Economics);

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  1. Macroeconomic implications of agglomeration
    by Christian Zimmermann in NEP-DGE blog on 2010-02-22 01:36:12
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Cited by:
  1. Gerald A. Carlino, 2011. "Three keys to the city: resources, agglomeration economies, and sorting," Business Review, Federal Reserve Bank of Philadelphia, issue Q3, pages 1-13.
  2. Jan Eeckhout & Roberto Pinheiro & Kurt Schmidheiny, 2010. "Spatial Sorting: Why New York, Los Angeles and DetroitAttract the Greatest Minds as well as the Unskilled," CESifo Working Paper Series 3274, CESifo Group Munich.

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