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Macroeconomic Implications of Agglomeration

  • Toni M. Whited

    (University of Rochester)

  • Jonas D.M. Fisher

    (Chicago Fed)

  • Morris A. Davis

    (University of Wisconsin)

We construct a dynamic general equilibrium model of cities and use it to estimate the effect of local agglomeration on per capita consumption growth. Agglomeration affects growth through the density of economic activity: higher production per unit of land raises local productivity. Firms take productivity as given; produce using a technology that has constant returns in developed land, capital, and labor; and accumulate land and capital. If land prices are rising, as they are empirically, firms economize on land. This behavior increases density and contributes to growth. We use a panel of U.S. cities and our model's predicted relationship among wages, output prices, housing rents, and labor quality to estimate the net e®ect of agglomeration on local wages. The impact of agglomeration on the level of wages is estimated to be 2 percent. Combined with our model and observed increases in land prices, this estimate implies that agglomeration raises per capita consumption growth by 10 percent.

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Paper provided by Society for Economic Dynamics in its series 2010 Meeting Papers with number 1330.

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Date of creation: 2010
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Handle: RePEc:red:sed010:1330
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Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

Web page: http://www.EconomicDynamics.org/
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