Agglomeration Elasticities and Firm Heterogeneity

Daniel Graham () and David Maré

SERC Discussion Papers from Centre for Economic Performance, LSE

Abstract: This paper estimates the relationship between agglomeration and multi factor productivity at the one digit industry level and by region using longitudinal firm level data for New Zealand. A key focus of the paper is on methods to represent firm level heterogeneity and non-random sorting of firms. The panel structure of the data allows us to control for it at the level of local industries or enterprises. We obtain a cross-sectional agglomeration elasticity of 0.171, which falls by 70% when we use local industry controls, and by 90% when we impose enterprise fixed effects. Using industry specific production functions, we find that the "within local industry" estimates are similar, though slightly larger than the cross sectional estimates (~0.070), suggesting negative sorting between areas, combined with positive sorting within areas. The within-enterprise estimates yield a small elasticity of 0.010. Our results indicate that the imposition of a common production technology across all industries is not a valid assumption. While cross-sectional estimates may overstate the true impact of agglomeration on productivity in the presence of positive bias from sorting, the within enterprise approach (which is increasingly common in the literature) can suffer from identification problems due to the highly persistent nature of agglomeration variables and may understate the true causal effect of agglomeration on productivity. We thus rely on the "within local industry" estimates as providing the most reliable indication of agglomeration elasticities.

Keywords: Agglomeration; urban density; productivity (search for similar items in EconPapers)
JEL-codes: L25 R12 R3 (search for similar items in EconPapers)
Date: 2010-02
New Economics Papers: this item is included in nep-eff and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
http://cep.lse.ac.uk/pubs/download/sercdp0043.pdf (application/pdf)

Related works:
Journal Article: Agglomeration elasticities and firm heterogeneity (2013)
Working Paper: Agglomeration elasticities and firm heterogeneity (2010)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cep:sercdp:0043

Access Statistics for this paper

More papers in SERC Discussion Papers from Centre for Economic Performance, LSE
Bibliographic data for series maintained by ().