Option 1: Size and Growth of Cities
1. Introduction:
• Labor and Capital are concentrated around cities, individual industries are as well
• Geographic concentration can resort from industry and the demands from those who are within the boundaries.
• Will lead into the lead the forces that lead to concentration, both clusters and aggregate activities in cities.
•Sources of agglomeration economies
-Sharing of input whose production with increased returns of scale
-Labor market pooling
2.1 The Scope of Urban Increasing Returns
• Economies exist when scale of urban environment adds to the productivity
• Industry Scope agglomeration economies extend across industry boundaries
• Geographic Scope proximity to where the city is located
• Temporal one agent’s interaction with another to have effect on productivity.
2.2 Strategiest for evaluating the Scope of Agglomeration Economies
2.2.1 Context
• External economies: shifters of an establishment’s production function.
• Aggregate urban external effect arises as sum of large number of individual externalities
• Increase in distance for spatial, industrial, or temporal will lead to attenuation of agglomerative effect of establishment
• Total benefit of agglomeration= the sume over interaction partners of effect with (geographic, industrial, and temporal distance)
2.2.2 Measuring the Scope
• A should include amount of economic activity present in different industries from j.
• Determines industries that will benefit from proximity
• Typically relies on one or more key aspects but NEVER all three
2.2.3 Estimating the production function: omitted variables and simultaneity
• Estimate the production function; xj (employment, land, capital, and materials)
• Labor inputs are easiest to measure (hours worked, workers, skill level)
2.2.4 Indirect strategies
• Four indirect approaches:
o Growth of total employment (easily available and linear)
o Scope and effect of agglomeration on productivity has been to focus on births of new establishments and employment
o Scope and influence of agglomeration is to study wages
o Rents (productivity should be capitalized in both wages and rents)
2.3 Industrial Scope
2.3.1 Urbanization or localization economies
• Localized industry disadvantages:
• Proxied by employment in the industry
o Work is chiefly of one kid
o Wages can be high and the cost of labor and money earnings for families are low
• Impact of Urbanization
• Doubling of industry scale leads to increase in productivity, while doubling city population leads to increase.
• Henderson and Nakamura are more favorable to localization economies
2.3.2 Specialization and Diversity
• Specify industrial scope: degree of employment specialization
• Combes argues specialization must be taken with caution, can lead to more growth among mature industries
• Absolute versus relative effects.
• Leads to diversity, can result in urbanization economy and encourages growth and births
2.3.3 Other work on industrial scope
• Spilt opinions between economists
• Manufacturing: specialization and diversity have negative effects, but eventually becomes positive
2.3.4 Continuity and industrial scope
• Distance between location is much more clear and easily calculated compared to distance between industries
• Cities emphasize managerial and information around activity of the specific benefits from the personal contacts
2.4 Geographic Scope
• Use to be based on political boundaries (ie. States, and counties)
• Measures county-level employment density, theory of agglomeration is based around density (positive effect)
• New arrivals are more likely to be attracted to zip codes as employment in the own industry within one mile increases
• Many of the effects are localized, but are also spillovers
2.5 Temporal Scope
• Static vs. Dynamic
o Dynamic effect: knowledge spillover, could take other forms
• 3 major estimation: individual rates being regressed attribute and characteristics of workers
o worker is at work, recent migrants would receiver higher wage because they are “most able”
• Workers leaving city, wages at new location are higher the larger the size of the previous city.
2.6 Industrial organization
2.6.1 Competition
• Local competition encourages innovation by forcing firms to innovate or fail
• Localization economies arise from the presence of establishments rather than size of the establishment
• Establishment size may be associated with different way of business
• Smaller establishments may be more flexible and open to nearby companies, and result in good neighbors
2.6.2 Industrial organization and business culture
• Local technological capabilities are not fundamental source
• Adding additional employee at a small firm typically has a significant and positive effect on births and new firm employment
• Henderson: small firms enjoy larger increment to the productivity, as own-industry employment increases in the same city
• “Bohemians” artistic occupation categories, tend to innovate more than do less creative cities
• Tolerant environment are more innovative
2.6.3 The Urban Rate Race
• Selection model: hard working individuals choose to locate in an active professional environment
o Work longer hours
• Rate Race Model: competition encourages individuals to work longer hours when its is important to be noticed
o Among young professionals who have most to gain
• Young individuals work longer hours: rivals are present and rewards
3. The sources of urban increasing returns
• 3 main assumed sources: Knowledge spillover, labor market pooling, and input sharing
• Marshallian microfoundations of agglomeration economies: Natrual advantages, Input sharing, Knowledge spillover, Home market effects, Consumption, Rent seeking, Multiple
• Same sort of evidence is required to identify the microfoundations of agglomeration economies, except even more data
• Ideal data is not always realistically available so some economic compromise is made
3.1. Increasing returns or natural advantage?
• Example of natural advantage: Steel industry thrived around great lakes because of the presence of iron, ore, and coal
• Marshal theorizes the chief causes of localization of industry being physical geographic conditions
• Natural resources are important in determining agglomerations, there for a smaller process of agglomeration
• Ellison and Glaeser show that the percentage of agglomeration that is predicted by the natural
advantage proxies is roughly 20%.
• Studies however often assume that various factors such as labor, are immobile which may skew research
• Little evidence of external economies impacting regional specialization.
3.2. What do the productivity studies have to say about microfoundations?
• agglomeration economies whose sources are knowledge spillovers, labor market pooling, or input sharing all manifest themselves in pretty much the same way in terms of productivity
• high productivity, employment, wages, and rents reflect the presence of agglomeration conomies. They are not, however, evidence of any particular agglomeration economy.
• Growth requires profitability. Profitability requires productivity, which may be enhanced in a dynamic sense by agglomeration economies.
• Growth fosters agglomeration by making inputs available to entrepreneurs.
• Claims such as spillover can be possible contributors of growth influenced by localization, but not necessarily the only contributor
• Increase in wage does not necessarily reflect the accumulation of knowledge or indicate a spillover
• Productivity studies have served to better indicate the existence of agglomeration economies, however they are less successful in identifying the source of the agglomeration economies
• Unable to make inferences from data on productivity, growth, or wages
3.3. Individual microfoundations
• one may be able to assess the theoretical claims on input sharing and agglomeration when relating information on actual input sharing taking place to location patterns
3.3.1. Input sharing
• Marshall’s notion of input sharing depends crucially on the existence of scale economies
in input production.
• Holmes studies the connection between the characteristics of a firm’s location – concentrated or not – on input sharing.
• industrial concentration strongly suggests input sharing
• The papers reviewed in this section provide fairly strong evidence that input sharing is important, both for cities and overall
3.3.2. Knowledge spillovers
• Difficult to identify as knowledge is not bought or sold
• Spatially concentrated areas
• Regions differ in the way their knowledge spills over
• Level of education in an area may be a contributing factor
3.3.3. Labor market pooling
• 2 related interpretations of labor market pooling.
• workers should be better matched in large cities (an urbanization effect) or in industrial concentrations (a localization effect).
• labor market pooling is fundamentally about risk.
• Risk can be worker and firm-specific or industry-specific
• an industry shock could result in a worker losing a job
• industry specific shock discourages localization, while the match-specific shocks described above encourage it.
3.3.4. Home market effects
• Home market effects exist
3.3.5. Consumption
• recently studies have emphasized the consumption possibilities of large cities as sources of agglomeration.
• In large cities, there may be goods and services available that are not available elsewhere
• Large cities may offer various aesthetic charms
• Large cities may allow the provision of public goods that would not be possible in a smaller place
• Relatively dense settlement of a large city allows speed of interaction that would not be possible in a smaller city (i.e., social interactions).
• The key idea is that a larger market may allow goods to be more closely tailored to individual consumers’ tastes.
• The idea that workers would be willing to give up real wage to enjoy a city’s consumption
amenities is a key concept and part of urban quality of life
3.3.6. Rent-seeking
Holmes speculates that public policy influences location patterns around borders and impacts location
3.4. The relative importance of Marshallian microfoundations
• Even in the absence of knowledge spillovers, Audretsch and Feldman show that innovation is more concentrated in an industry with a high ratio of R&D to sales, a greater reliance on skilled labor, and where more university research is devoted to research relevant to that industry.
• Concentration of industry, concentration of production
• Ellison and Glaeser’s equation measures spatial concentration without any contamination associated with industrial organization.
4. Case evidence
• even the most refined data set and most sophisticated econometric techniques will not be able to address all of the idiosyncratic conditions that contribute to agglomeration
• There is much to be learned about the nature of agglomeration
From actual case studies.
4.1. The New York Metropolitan Region Study
• External economies are central to NY’s history
• Transportation and ports spurred industry, shipping fostered trade
• Valuable case study but cannot draw universal conclusions from it
4.2. Regional Clusters of Innovation Project
• Study competition
• The heart of the approach is that a business will become more productive when factor markets are favorable, when suppliers are available, when consumers are demanding, and when competitive pressures compel sustained innovation.
• Cluster mapping project identifies 41 clusters in North America
• Institutions matter to agglomerations, such as alumni networks
• Can account for specifics such as government actions and taxes
4.3. Regional advantage
• Silicon valley, regional advantage of corporate organization which valued and fostered rapid change, even in terms of changing jobs, contributing to a knowledge spill over
5. Conclusion
• Questions whether old or new, can still help us identify knowledge and knowledge gaps that could influence public policy as well as future productivity
• The more knowledge of successful agglomeration economies we have, the more successful we will be in encouraging their duplication else where
