Estimation of semiparametric sorting models: Explaining geographical concentration of business services

We introduce a sorting model for firms where firm-specific profit coefficients can be identified given information on location choices of firms. It is shown that one may estimate such a model using a semiparametric Poisson approach. We apply this approach by examining the effects of specialization and diversity at the local level on profitability of business services firms. We find that, for most firms, profitability increases with specialization and decreases with diversity. In line with the literature, it is shown that specialization is particularly profitable for large and older firms, whereas diversity is relatively more profitable for smaller and younger firms.