Firm Sorting and Agglomeration
American Economic Review · 2018 · Volume 108 · Issue 11
Abstract
To account for the uneven distribution of economic activity in space, I propose a theory of the location choices of heterogeneous firms in a variety of sectors across cities. In equilibrium, the distribution of city sizes and the sorting patterns of firms are uniquely determined and affect aggregate TFP and welfare. I estimate the model using French firm-level data and find that nearly half of the productivity advantage of large cities is due to firm sorting, the rest coming from agglomeration economies. I quantify the general equilibrium effects of place-based policies: policies that subsidize smaller cities have negative aggregate effects.
Keywords
Firm Behavior: Empirical Analysis, Production, Cost, Capital, Total Factor, and Multifactor Productivity, Capacity, Regional Economic Activity: Growth, Development, Environmental Issues, and Changes, Other Spatial Production and Pricing Analysis
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