Urban Specialisation; from Sectoral to Functional

48 Pages Posted: 26 Jan 2021

See all articles by Antoine Gervais

Antoine Gervais

University of Sherbrooke - Department of Economics

James R. Markusen

University of Colorado at Boulder - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Anthony J. Venables

University of Oxford; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 3 versions of this paper

Date Written: 2021

Abstract

The comparative advantage of many cities is based on their efficiency in the production of ‘functions’, e.g., business services such as finance, law, engineering, or similar functions that are used by firms in a wide range of sectors. Firms that use these functions may choose to source them locally, or to purchase them from other cities. The former case gives rise to cities developing a pattern of sectoral specialization, and the latter a pattern of functional specialization. This paper develops a model to investigate circumstances under which either of these outcomes is more likely, and finds that predictions of the model are consistent with changes in the pattern of specialization in the US over recent decades. The model combines elements of the literatures on economic geography, multinational firms, urban economics, and trade theory. A two-city country trades with the larger world, and workers within the country are mobile between the two cities. Productivity in a given function varies across cities, giving rise to urban comparative advantage. This may be due to exogenous technological differences (Ricardian) or to city- and functionspecific scale economies. Sectors differ in the intensity with which they use different functions, giving rise to a pattern of sectoral and functional specialisation. We generate a number of economic insights, including that, as costs of remote sourcing fall, cities’ functional specialization tends to increase and their sectoral specialization falls. We examine the model’s predictions empirically over a 20-30-year period for US states. In line with the predictions of the model, we find that functional concentration rises and sectoral concentration falls over this time span. Similarly, we find that regional specialization in functions rises and regional specialization in sectors falls over the period.

JEL Classification: R110, R120, R130, F230

Suggested Citation

Gervais, Antoine and Markusen, James R. and Venables, Anthony J., Urban Specialisation; from Sectoral to Functional (2021). CESifo Working Paper No. 8837, Available at SSRN: https://ssrn.com/abstract=3770459 or http://dx.doi.org/10.2139/ssrn.3770459

Antoine Gervais (Contact Author)

University of Sherbrooke - Department of Economics ( email )

2500 bd de l'Universite
Sherbrooke, Québec J1K 2R1
Canada

James R. Markusen

University of Colorado at Boulder - Department of Economics ( email )

Campus Box 256
Boulder, CO 80309
United States
303-492-0748 (Phone)
303-492-8960 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Anthony J. Venables

University of Oxford ( email )

Mansfield Road
Oxford, Oxfordshire OX1 4AU
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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