Macroeconomic implications of agglomeration

Morris Davis, Jonas Fisher and Toni Whited

No WP-2010-02, Working Paper Series from Federal Reserve Bank of Chicago

Abstract: The authors 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. They 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 effect of agglomeration on local wages. The impact of agglomeration on the level of wages is estimated to be 2 percent. Combined with their model and observed increases in land prices, this estimate implies that agglomeration raises per capita consumption growth by 10 percent.

Keywords: Macroeconomics; Consumption (Economics) (search for similar items in EconPapers)
Date: 2010
New Economics Papers: this item is included in nep-dge, nep-eff, nep-geo, nep-mac and nep-ure
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Citations: View citations in EconPapers (4)

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Related works:
Journal Article: Macroeconomic Implications of Agglomeration (2014)
Working Paper: Macroeconomic Implications of Agglomeration (2013)
Working Paper: Macroeconomic Implications of Agglomeration (2010)
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