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The Productivity Advantages of Large Cities: Distinguishing Agglomeration from Firm Selection

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Listed:
  • Combes, Pierre-Philippe

    (GATE, University of Lyon)

  • Duranton, Gilles

    (University of Pennsylvania)

  • Gobillon, Laurent

    (Paris School of Economics)

  • Puga, Diego

    (IMDEA)

  • Roux, Sébastien

    (CREST-INSEE)

Abstract

Firms are more productive on average in larger cities. Two main explanations have been offered: firm selection (larger cities toughen competition, allowing only the most productive to survive) and agglomeration economies (larger cities promote interactions that increase productivity), possibly reinforced by localised natural advantage. To distinguish between them, we nest a generalised version of a tractable firm selection model and a standard model of agglomeration. Stronger selection in larger cities left-truncates the productivity distribution whereas stronger agglomeration right-shifts and dilates the distribution. Using this prediction, French establishment level data, and a new quantile approach, we show that firm selection cannot explain spatial productivity differences. This result holds across sectors, city size thresholds, establishment samples, and area definitions.

Suggested Citation

  • Combes, Pierre-Philippe & Duranton, Gilles & Gobillon, Laurent & Puga, Diego & Roux, Sébastien, 2012. "The Productivity Advantages of Large Cities: Distinguishing Agglomeration from Firm Selection," IZA Discussion Papers 6502, Institute of Labor Economics (IZA).
  • Handle: RePEc:iza:izadps:dp6502
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    More about this item

    Keywords

    agglomeration; firm selection; productivity; cities;
    All these keywords.

    JEL classification:

    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • R12 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Size and Spatial Distributions of Regional Economic Activity; Interregional Trade (economic geography)
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity

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