Agglomeration or Selection? The Case of the Japanese Silk-reeling Industry, 1909-1916

Plants in clusters are often more productive than those located in non-clusters. This has been explained by agglomeration effects that improve productivity of all plants in a region. However, recent theoretical development of trade and spatial economic theories with heterogeneous firms has shed light on another channel of productivity improvement in clusters, "plant-selection effects." This paper uses plant-level data on the Japanese silk reeling industry from 1909 to 1916 to distinguish between these two effects based on a nested model of firm-selection and agglomeration. We identify the plant-selection effect by using the fact that the two effects have different implications on the distribution of plant-level productivity. Major findings are as follows. First, we confirmed that plants in clusters were indeed more productive. Second, at the same time, the widths of distribution of plant productivity in clusters were narrower and more severely truncated than those in non-clusters. Finally, productivity distribution did not shift rightwards in clusters. Our findings imply that the plant-selection effect was the source of the higher plant-level productivity in silk-reeling clusters in this period.