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The productivity advantages

of large cities: distinguishing agglomeration from firm selection

EFIGE working paper 19

October 2009

Previously published in the CEPR Discussion Paper Series No.7191

Pierre-Philippe Combes, Gilles Duranton,

Laurent Gobillon, Diego Puga and Sébastien Roux

EFIGE IS A PROJECT DESIGNED TO HELP IDENTIFY THE INTERNAL POLICIES NEEDED TO IMPROVE EUROPE•S EXTERNAL COMPETITIVENESS

Funded under the

Socio-economic

Sciences and

Humanities

Programme of the

Seventh

Framework

Programme of the

European Union.

LEGAL NOTICE: The

research leading to these results has received funding from the

European Community"s

Seventh Framework

Programme (FP7/2007-

2013) under grant

agreement n° 225551.

The views expressed in

this publication are the sole responsibility of the authors and do not necessarily reflect the views of the European

Commission.The EFIGE project is coordinated by Bruegel and involves the following partner organisations: Universidad Carlos III de Madrid, Centre for

Economic Policy Research (CEPR), Institute of Economics Hungarian Academy of Sciences (IEHAS), Institut für Angewandte Wirtschafts-

forschung (IAW), Centro Studi Luca D"Agliano (Ld•A), Unitcredit Group, Centre d•Etudes Prospectives et d•Informations Internationales (CEPII).

The EFIGE partners also work together with the following associate partners: Banque de France, Banco de España, Banca d•Italia, Deutsche

Bundesbank, National Bank of Belgium, OECD Economics Department.

DISCUSSION PAPER SERIES

ABCD www.cepr.org

Available online at:

www.cepr.org/pubs/dps/DP7191.asp www.ssrn.com/xxx/xxx/xxx

No. 7191

THE PRODUCTIVITY ADVANTAGES

OF LARGE CITIES: DISTINGUISHING

AGGLOMERATION FROM FIRM

SELECTION

Pierre-Philippe Combes, Gilles Duranton,

Laurent Gobillon, Diego Puga

and Sébastien Roux

INDUSTRIAL ORGANIZATION and

INTERNATIONAL TRADE AND REGIONAL

ECONOMICS

ISSN 0265-8003

THE PRODUCTIVITY ADVANTAGES

OF LARGE CITIES: DISTINGUISHING

AGGLOMERATION FROM FIRM

SELECTION

Pierre-Philippe Combes, Université d'Aix-Marseille and CEPR

Gilles Duranton, University of Toronto and CEPR

Laurent Gobillon, Institut National d'Etudes Demographiques,

PSE-INRA and CREST

Diego Puga, IMDEA and Universidad Carlos III and CEPR

Sébastien Roux, CREST-INSEE

Discussion Paper No. 7191

March 2009

Centre for Economic Policy Research

53-56 Gt Sutton St, London EC1V 0DG, UK

Tel: (44 20) 7183 8801, Fax: (44 20) 7183 8820

Email: cepr@cepr.org, Website: www.cepr.org

This Discussion Paper is issued under the auspices of the Centre's research programme in INDUSTRIAL ORGANIZATION and INTERNATIONAL TRADE AND REGIONAL ECONOMICS. Any opinions expressed here are those of the author(s) and not those of the Centre for Economic Policy Research. Research disseminated by CEPR may include views on policy, but the Centre itself takes no institutional policy positions. The Centre for Economic Policy Research was established in 1983 as an educational charity, to promote independent analysis and public discussion of open economies and the relations among them. It is pluralist and non- partisan, bringing economic research to bear on the analysis of medium- and long-run policy questions. These Discussion Papers often represent preliminary or incomplete work, circulated to encourage discussion and comment. Citation and use of such a paper should take account of its provisional character. Copyright: Pierre-Philippe Combes, Gilles Duranton, Laurent Gobillon, Diego

Puga and Sébastien Roux

CEPR Discussion Paper No. 7191

March 2009

ABSTRACT

The productivity advantages of large cities: Distinguishing agglomeration from firm selection Firms are more productive on average in larger cities. Two explanations have been offered: agglomeration economies (larger cities promote interactions that increase productivity) and firm selection (larger cities toughen competition allowing only the most productive to survive). To distinguish between them, we nest a generalised version of a seminal 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. We assess the relative importance of agglomeration and firm selection using French establishment-level data and a new quantile approach. Spatial productivity differences in France are mostly explained by agglomeration.

JEL Classification: C52, D24 and R12

Keywords: agglomeration, cities, firm selection and productivity

Pierre-Philippe Combes

GREQAM

2, Rue de la Charité

13 236 Marseille Cedex 2

FRANCE

Email: ppcombes@univmed.fr

For further Discussion Papers by this author see:

Gilles Duranton

Department of Economics

University of Toronto

150 Saint George Street

Toronto, Ontario M5S 3G7

CANADA

Email: gilles.duranton@utoronto.ca

For further Discussion Papers by this author see:

Laurent Gobillon

National Institute of Demographic

(INED)

133 Boulevard Davout

75980 Paris Cedex 20

FRANCE

Email: laurent.gobillon@ined.fr

For further Discussion Papers by this author see:

Diego Puga IMDEA and Universidad Carlos III

Calle Madrid 126

Desp. 15.2.07

28903 Getafe

SPAIN

Email: diego.puga@imdea.org

For further Discussion Papers by this author see:

Sébastien Roux

Centre de Recherche en Économie et

Statistique (CREST)

15 Boulevard Gabriel Péri

92245 Malakoff Cedex

FRANCE

Email: sebastien.roux@ensae.fr

For further Discussion Papers by this author see:

Submitted 20 February 2009

*This paper is produced as part of the project European Firms in a Global Economy: Internal policies for external competitiveness (EFIGE), a Collaborative Project funded by the European Commission's Seventh Research Framework Programme, Contract number 225551. We thank Kristian Behrens, Stéphane Grégoir, Marc Melitz, Peter Neary, Gianmarco Ottaviano, Giovanni Peri, Stephen Redding, John Sutton, Dan Trefler, and conference and seminar participants for comments and discussions. We gratefully acknowledge funding from the Agence Nationale de la Recherche (grant COMPNASTA), the Canadian Social Science and Humanities Research Council, the Centre National de la Recherche Scientifique, the Comunidad de Madrid (grant prociudadcm), the European Commission's Seventh Research Framework Programme and the Fundación Ramón Areces.

ISSN 0265-8003

THE PRODUCTIVITY ADVANTAGES

OF LARGE CITIES: DISTINGUISHING

AGGLOMERATION FROM FIRM

SELECTION

Pierre-Philippe Combes, Université d'Aix-Marseille and CEPR

Gilles Duranton, University of Toronto and CEPR

Laurent Gobillon, Institut National d'Etudes Demographiques,

PSE-INRA and CREST

Diego Puga, IMDEA, Universidad Carlos III de Madrid and CEPR

Sébastien Roux, CREST-INSEE

Discussion Paper No. 7191

March 2009

Centre for Economic Policy Research

53-56 Gt Sutton St, London EC1V 0DG, UK

Tel: (44 20) 7183 8801, Fax: (44 20) 7183 8820

Email: cepr@cepr.org, Website: www.cepr.org

This Discussion Paper is issued under the auspices of the Centre's research programme in INDUSTRIAL ORGANIZATION and INTERNATIONAL TRADE AND REGIONAL ECONOMICS. Any opinions expressed here are those of the author(s) and not those of the Centre for Economic Policy Research. Research disseminated by CEPR may include views on policy, but the Centre itself takes no institutional policy positions. The Centre for Economic Policy Research was established in 1983 as an educational charity, to promote independent analysis and public discussion of open economies and the relations among them. It is pluralist and non- partisan, bringing economic research to bear on the analysis of medium- and long-run policy questions. These Discussion Papers often represent preliminary or incomplete work, circulated to encourage discussion and comment. Citation and use of such a paper should take account of its provisional character. Copyright: Pierre-Philippe Combes, Gilles Duranton, Laurent Gobillon, Diego

Puga and Sébastien Roux

CEPR Discussion Paper No. 7191

March 2009

ABSTRACT

The productivity advantages of large cities: Distinguishing agglomeration from firm selection Firms are more productive on average in larger cities. Two explanations have been offered: agglomeration economies (larger cities promote interactions that increase productivity) and firm selection (larger cities toughen competition allowing only the most productive to survive). To distinguish between them, we nest a generalised version of a seminal 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. We assess the relative importance of agglomeration and firm selection using French establishment-level data and a new quantile approach. Spatial productivity differences in France are mostly explained by agglomeration.

JEL Classification: C52, D24 and R12

Keywords: agglomeration, cities, firm selection and productivity

Pierre-Philippe Combes

GREQAM

2, Rue de la Charité

13 236 Marseille Cedex 2

FRANCE

Email: ppcombes@univmed.fr

For further Discussion Papers by this author see:

Gilles Duranton

Department of Economics

University of Toronto

150 Saint George Street

Toronto, Ontario M5S 3G7

CANADA

Email: gilles.duranton@utoronto.ca

For further Discussion Papers by this author see:

Laurent Gobillon

National Institute of Demographic

(INED)

133 Boulevard Davout

75980 Paris Cedex 20

FRANCE

Email: laurent.gobillon@ined.fr

For further Discussion Papers by this author see:

Diego Puga

Departamento de Economia (IMDEA)

Universidad Carlos III de Madrid

Calle Madrid 126

28903 Getafe

SPAIN

Email: diego.puga@imdea.org

For further Discussion Papers by this author see:

Sébastien Roux

Centre de Recherche en Économie et

Statistique (CREST)

15 Boulevard Gabriel Péri

92245 Malakoff Cedex

FRANCE

Email: sebastien.roux@ensae.fr

For further Discussion Papers by this author see:

Submitted 20 February 2009

We thank Kristian Behrens, Stéphane Grégoir, Marc Melitz, Peter Neary, Gianmarco Ottaviano, Giovanni Peri, Stephen Redding, John Sutton, Dan Trefler, and conference and seminar participants for comments and discussions. We gratefully acknowledge funding from the Agence Nationale de la Recherche (grant COMPNASTA), the Canadian Social Science and Humanities Research Council, the Centre National de la Recherche Scientifique, the Comunidad de Madrid (grant prociudadcm), the European Commission's Seventh Research Framework Programme (contract number

225551, collaborative project European Firms in a Global Economy - EFIGE),

and the Fundación Ramón Areces.

1. Introduction

Firms and workers are, on average, more productive in larger cities. This fact - already discussed by Adam Smith ( 1776) and AlfredMarshall ( 1890) - is now firmly established empirically (see

Rosenthal and Strange

,2004, andMelo, Graham, and Noland ,2009, for reviews and summaries of existing findings). Estimates of the magnitude of this effect range between a2and7percent productivity increase from a doubling of city size for a large range of city sizes, depending on the sector and details of the estimation procedure. For a long time, the higher average productivity of firms and workers in larger cities has beenquotesdbs_dbs19.pdfusesText_25

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