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Identifying Agglomeration Spillovers: Evidence from Million Dollar Plants

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Author Info

  • Michael Greenstone

    ()
    (Massachusetts Institute of Technology and NBER, USA)

  • Richard Hornbeck

    ()
    (Massachusetts Institute of Technology, USA)

  • Enrico Moretti

    ()
    (University of California and NBER, USA and The Rimini Centre of Economic Analisys, Italy)

Abstract

We quantify agglomeration spillovers by estimating the impact of the opening of a large new manufacturing plant on the total factor productivity (TFP) of incumbent plants in the same county. Articles in the corporate real estate journal Site Selection reveal the county where the "Million Dollar Plant" ultimately chose to locate (the "winning county"), as well as the one or two runner-up counties (the "losing counties"). The incumbent plants in the losing counties are used as a counterfactual for the TFP of incumbent plants in winning counties in the absence of the plant opening. Incumbent plants in winning and losing counties have economically and statistically similar trends in TFP in the 7 years before the opening, which supports the validity of the identifying assumption. After the new plant opening, incumbent plants in winning counties experience a sharp relative increase in TFP. Five years after the opening, TFP of incumbent plants in winning counties is 12% higher than TFP of incumbent plants in losing counties. Consistent with some theories of agglomeration, this effect is larger for incumbent plants that share similar labor and technology pools with the new plant. We also find evidence of a relative increase in skill-adjusted labor costs in winning counties, indicating that the ultimate effect on profits is smaller than the direct increase in productivity.

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Bibliographic Info

Paper provided by The Rimini Centre for Economic Analysis in its series Working Paper Series with number 36-08.

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Date of creation: Jan 2008
Date of revision: Jan 2008
Handle: RePEc:rim:rimwps:36-08

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