The Saturation Principle – An Urban Scaling approach to Evolutionary Economic Geography

Why do some urban regions sustain a much broader range of economic activities than others? Evolutionary Economic Geography (EEG) has answered this question mainly through the principle of relatedness, in which urban scale has been treated as a control variable. Doing so, it has paid little attention to regional urban scale as a structural determinant of sectoral diversity. . We address this gap by combining the urban scaling tradition with EEG's capability-theoretic framework. Our study explores the relationship between sectoral diversity, urban size, and regional capabilities for US metropolitan statistical areas (MSAs) over the period 2012–2023. Three findings emerge. First, sectoral diversity scales logarithmically with population and the relationship is temporally stable across the panel — what we call the saturation principle: urban scale defines a diminishing-returns frontier for sectoral breadth. Second, regional capabilities (proxied by the Economic Complexity Index) are associated with deviations from this frontier and with the technological intensity of newly entered sectors. Third, urban scale conditions these capability effects asymmetrically — compressing the capability premium for sectoral breadth as regions approach the frontier, while amplifying the conversion of capabilities into more technologically intensive entries. Overall, the study contributes to bridging urban scaling theory and EEG by formalising urban scale as a structural boundary condition for regional diversification.