On the productivity advantage of cities

Nick Jacob and Giordano Mion

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: Ever since Marshall (1890) agglomeration externalities have been viewed as the key factor explaining the existence of cities and their size. However, while the various micro foundations of agglomeration externalities stress the importance of Total Factor Productivity (TFP), the empirical evidence on agglomeration externalities rests on measures obtained using firm revenue or value-added as a measure of firm output: revenue-based TFP (TFP-R). This paper uses data on French manufacturing firms' revenue, quantity and prices to estimate TFP and TFP-R and decompose the latter into various elements. Our analysis suggests that the revenue productivity advantage of denser areas is mainly driven by higher prices charged rather than differences in TFP. At the same time, firms in denser areas are able to sell higher quantities, and generate higher revenues, despite higher prices. These and other results we document suggest that firms in denser areas are able to charge higher prices because they sell higher demand/quality products. Finally, while the correlation between firm revenue TFP and firm size is positive in each location, it is also systematically related to density: firms with higher (lower) TFP-R account for a larger (smaller) share of total revenue in denser areas. These patterns thus amplify in aggregate regional-level figures any firm-level differences in productivity across space.

Keywords: total factor productivity (TFP); density; agglomeration externalities; revenue-based TFP; prices; demand; quality (search for similar items in EconPapers)
JEL-codes: D24 L11 R12 R15 (search for similar items in EconPapers)
Pages: 66 pages
Date: 2020-04
New Economics Papers: this item is included in nep-bec, nep-eur, nep-sbm and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

Downloads: (external link)
http://eprints.lse.ac.uk/108436/ Open access version. (application/pdf)

Related works:
Journal Article: On the productivity advantage of cities (2024)
Working Paper: On the productivity advantage of cities (2020)
Working Paper: On the Productivity Advantage of Cities (2020)
Working Paper: On the productivity advantage of cities (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:108436

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