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A Transactions-Cost Theory of Agglomeration Economies

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  • Avner Greif
  • Andres Rodriguez-Clare

Abstract

July 11, 1995 In contrast to recent work in Regional Economics which emphasizes the role of an industry's scale in generating agglomeration economies, this paper emphasizes the importance of an industry's composition, that is, the number of firms generating agglomeration economies. As most recent work in this area, we assume that production is characterized by the use of non-tradable intermediate goods produced with decreasing average costs. Concentration leads to competition for inputs among final good producers, and thus provides a governance structure that mitigates the commitment problem intrinsic in the relationship between the intermediate goods' suppliers and final good producers. Hence, the paper establishes a link between the number of firms in the industry in a particular region, variety of industry-specific inputs, production costs, transaction costs, and producers' profits. Furthermore, the paper demonstrates that the scale effect and the composition effect can re-enforce each other. The paper's theoretical framework is applied to examine the concentration of the automobile industry in Michigan.

Suggested Citation

  • Avner Greif & Andres Rodriguez-Clare, 1995. "A Transactions-Cost Theory of Agglomeration Economies," Working Papers 95003, Stanford University, Department of Economics.
    • Handle: RePEc:wop:stanec:95003
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    Cited by:

    1. Piet De Vries & Gert‐Jan Hospers, 2006. "Transaction Costs, Agglomeration Economies, and Industrial Location: A Comment," Growth and Change, Wiley Blackwell, vol. 37(2), pages 307-314, June.
    2. Rebecca Bradley & Joshua S. Gans, 1998. "Growth in Australian Cities," The Economic Record, The Economic Society of Australia, vol. 74(226), pages 266-278, September.
    3. de Fontenay, Catherine C., 2004. "The dual role of market power in the Big Push: from evidence to theory," Journal of Development Economics, Elsevier, vol. 75(1), pages 221-238, October.
    4. Catherine deFontenay, 2000. "Market Power and the Failure of the Big Push: Evidence and Theory," Econometric Society World Congress 2000 Contributed Papers 1269, Econometric Society.

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