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Agglomeration Elasticities and Firm Heterogeneity

Listed author(s):
  • Daniel J. Graham
  • David C. Maré

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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File URL: http://www.spatialeconomics.ac.uk/textonly/SERC/publications/download/sercdp0043.pdf
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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
Handle: RePEc:cep:sercdp:0043
Contact details of provider: Web page: http://www.spatialeconomics.ac.uk/SERC/publications/default.asp

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  1. 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.
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  3. Griliches, Zvi & Hausman, Jerry A., 1986. "Errors in variables in panel data," Journal of Econometrics, Elsevier, vol. 31(1), pages 93-118, February.
  4. Daniel J. Graham & Kurt van Dender, 2009. "Estimating the Agglomeration Benefits of Transport Investments: Some Tests for Stability," OECD/ITF Joint Transport Research Centre Discussion Papers 2009/32, OECD Publishing.
  5. Duranton, Gilles & Puga, Diego, 2003. "Microfoundations of Urban Agglomeration Economies," CEPR Discussion Papers 4062, C.E.P.R. Discussion Papers.
  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. Overman, Henry G & Puga, Diego, 2009. "Labour Pooling As a Source of Agglomeration: An Empirical Investigation," CEPR Discussion Papers 7174, C.E.P.R. Discussion Papers.
  8. Zvi Griliches & Jacques Mairesse, 1995. "Production Functions: The Search for Identification," NBER Working Papers 5067, National Bureau of Economic Research, Inc.
  9. Pierre-Philippe Combes & Gilles Duranton & Laurent Gobillon & Sébastien Roux, 2008. "Estimating Agglomeration Economies with History, Geology and Worker Effects," Working Papers 2008-22, Centre de Recherche en Economie et Statistique.
  10. Combes, Pierre-Philippe & Duranton, Gilles & Gobillon, Laurent, 2004. "Spatial Wage Disparities: Sorting Matters!," CEPR Discussion Papers 4240, C.E.P.R. Discussion Papers.
  11. 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.
  12. David C. Maré & Daniel J. Graham, 2009. "Agglomeration Elasticities in New Zealand," Working Papers 09_06, Motu Economic and Public Policy Research.
  13. Williamson, John & Paling, Richard & Waite, David, 2008. "Assessing Agglomeration Impacts in Auckland: Phase 1," Occasional Papers 08/5, Ministry of Economic Development, New Zealand.
  14. 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.
  15. Ackerberg, Daniel & Caves, Kevin & Frazer, Garth, 2006. "Structural identification of production functions," MPRA Paper 38349, University Library of Munich, Germany.
  16. Jordi Jofre-Monseny & Raquel Marín-López & Elisabet Viladecans-Marsal, 2010. "The mechanisms of agglomeration: Evidence from the effect of inter-industry relations on the location of new firms," Working Papers 2010/49, Institut d'Economia de Barcelona (IEB).
  17. Olley, G Steven & Pakes, Ariel, 1996. "The Dynamics of Productivity in the Telecommunications Equipment Industry," Econometrica, Econometric Society, vol. 64(6), pages 1263-1297, November.
  18. Maré, David, 2008. "Labour Productivity in Auckland Firms," Occasional Papers 08/9, Ministry of Economic Development, New Zealand.
  19. Sabrina Di Addario & Eleonora Patacchini, 2007. "Wages and the City. Evidence from Italy," Development Working Papers 231, Centro Studi Luca d'Agliano, University of Milano.
  20. 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.
  21. Daniel Graham & H. Kim, 2008. "An empirical analytical framework for agglomeration economies," The Annals of Regional Science, Springer;Western Regional Science Association, vol. 42(2), pages 267-289, June.
  22. 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.
  23. 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.
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