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Identifying Agglomeration Spillovers: Evidence from Million Dollar Plants

68 Pages Posted: 27 Dec 2007 Last revised: 28 Apr 2010

Michael Greenstone

University of Chicago - Department of Economics; National Bureau of Economic Research (NBER)

Richard Hornbeck

University of Chicago - Booth School of Business

Enrico Moretti

University of California, Berkeley - Department of Economics; National Bureau of Economic Research (NBER); IZA Institute of Labor Economics

Multiple version iconThere are 2 versions of this paper

Date Written: December 19, 2007

Abstract

We quantify agglomeration spillovers by estimating the impact of the opening of a large manufacturing plant on the total factor productivity (TFP) of incumbent plants in the same county. We use the location rankings of profit-maximizing firms to compare incumbent plants in the county where the new plant ultimately chose to locate (the “winning county”), with incumbent plants in the runner-up county (the “losing county”). Incumbent plants in winning and losing counties have similar trends in TFP in the seven years before the new plant opening. Five years after the new plant opening, TFP of incumbent plants in winning counties is 12% higher than TFP of incumbent plants in losing counties. Consistent with some theories of agglomeration economies, this effect is larger for incumbent plants that share similar labor and technology pools with the new plant. Consistent with a spatial equilibrium model, we find evidence of a relative increase in skill-adjusted labor costs in winning counties. This indicates that the ultimate effect on profits is smaller than the direct increase in productivity.

Keywords: agglomeration, spillovers, TFP, total factor productivity, network effects, externalities, social interactions, local competition for firms, urban development

JEL Classification: D24, L1, R1, H25, O1, J2, J3

Suggested Citation

Greenstone, Michael and Hornbeck, Richard and Moretti, Enrico, Identifying Agglomeration Spillovers: Evidence from Million Dollar Plants (December 19, 2007). MIT Department of Economics Working Paper No. 07-31. Available at SSRN: https://ssrn.com/abstract=1078027 or http://dx.doi.org/10.2139/ssrn.1078027

Michael Greenstone (Contact Author)

University of Chicago - Department of Economics ( email )

1126 East 59th Street
Chicago, IL 60637
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
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Richard Hornbeck

University of Chicago - Booth School of Business

5807 South Woodlawn Avenue
Chicago, IL 60637
United States

Enrico Moretti

University of California, Berkeley - Department of Economics ( email )

549 Evans Hall #3880
Berkeley, CA 94720-3880
United States

HOME PAGE: http://emlab.berkeley.edu/~moretti/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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