The Productivity Advantages of Large Cities: Distinguishing Agglomeration from Firm Selection
Firms are more productive on average in larger cities. Two explanations have been offered: agglomeration economies (larger cities promote interactions that increase productivity) and firm selection (larger cities toughen competition allowing only the most productive to survive). To distinguish between them, we nest a generalised version of a seminal firm selection model and a standard model of agglomeration. Stronger selection in larger cities left truncates the productivity distribution whereas stronger agglomeration right shifts and dilates the distribution. We assess the relative importance of agglomeration and firm selection using French establishment level data and a new quantile approach. Spatial productivity differences in France are mostly explained by agglomeration.
October 2009 Paper Number SERCDP0027