The Productivity Advantages of Large Cities: Distinguishing Agglomeration from Firm Selection

45 Pages Posted: 28 Apr 2012

See all articles by Pierre-Philippe Combes

Pierre-Philippe Combes

Sciences Po - Department of Economics; Centre for Economic Policy Research (CEPR)

Gilles Duranton

London School of Economics & Political Science (LSE) - Department of Geography and Environment; Centre for Economic Policy Research (CEPR)

Laurent Gobillon

National Institute of Statistics and Economic Studies (INSEE) - Center for Research in Economics and Statistics (CREST); National Institute of Demographic Studies (INED)

Diego Puga

IMDEA Social Sciences; University of Toronto - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Sébastien Roux

National Institute of Statistics and Economic Studies (INSEE) - Center for Research in Economics and Statistics (CREST)

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Abstract

Firms are more productive on average in larger cities. Two main explanations have been offered: firm selection (larger cities toughen competition, allowing only the most productive to survive) and agglomeration economies (larger cities promote interactions that increase productivity), possibly reinforced by localised natural advantage. To distinguish between them, we nest a generalised version of a tractable 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. Using this prediction, French establishment level data, and a new quantile approach, we show that firm selection cannot explain spatial productivity differences. This result holds across sectors, city size thresholds, establishment samples, and area definitions.

Keywords: productivity, firm selection, agglomeration, cities

JEL Classification: C52, R12, D24

Suggested Citation

Combes, Pierre-Philippe and Duranton, Gilles and Gobillon, Laurent and Puga, Diego and Roux, Sébastien, The Productivity Advantages of Large Cities: Distinguishing Agglomeration from Firm Selection. IZA Discussion Paper No. 6502, Available at SSRN: https://ssrn.com/abstract=2047288 or http://dx.doi.org/10.2139/ssrn.2047288

Pierre-Philippe Combes (Contact Author)

Sciences Po - Department of Economics ( email )

28, rue des Saints peres
Paris, 75007
France

HOME PAGE: http://https://www.gate.cnrs.fr/ppcombes

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Gilles Duranton

London School of Economics & Political Science (LSE) - Department of Geography and Environment ( email )

Houghton Street
London, WC2A 2AE
United Kingdom
+44 20 7955 7604 (Phone)
+44 20 7955 7412 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Laurent Gobillon

National Institute of Statistics and Economic Studies (INSEE) - Center for Research in Economics and Statistics (CREST) ( email )

15 Boulevard Gabriel Peri
Malakoff Cedex, 1 92245
France

National Institute of Demographic Studies (INED) ( email )

133, Boulevard Davout
Paris cedex 20, France 75980
France
+33 1 5606 2016 (Phone)
+33 1 5606 2199 (Fax)

HOME PAGE: http://laurent.gobillon.free.fr/

Diego Puga

IMDEA Social Sciences ( email )

Calle Veláquez 76
Madrid, 28001
Spain

University of Toronto - Department of Economics ( email )

150 St. George Street
Toronto, Ontario M5S 3G7
Canada
416-978-4375 (Phone)
416-978-6713 (Fax)

HOME PAGE: http://dpuga.economics.utoronto.ca/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Sébastien Roux

National Institute of Statistics and Economic Studies (INSEE) - Center for Research in Economics and Statistics (CREST) ( email )

15 Boulevard Gabriel Peri
Malakoff Cedex, 1 92245
France

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