Macroeconomic Implications of Agglomeration

Toni Whited, Jonas Fisher and Morris Davis

No 1330, 2010 Meeting Papers from Society for Economic Dynamics

Abstract: 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.

Date: 2010
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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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