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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 localized natural advantage. To distinguish between them, we nest a generalized 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.
This is the peer reviewed version of the following article: Combes, P.-P., Duranton, G., Gobillon, L., Puga, D. and Roux, S. (2012), The Productivity Advantages of Large Cities: Distinguishing Agglomeration From Firm Selection. Econometrica, 80: 2543–2594., which has been published in final form at DOI: 10.3982/ECTA8442. This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Self-Archiving http://olabout.wiley.com/WileyCDA/Section/id-820227.html#terms.
agglomeration, firm selection, productivity, cities
Combes, P., Duranton, G., Gobillon, L., Puga, D., & Roux, S. (2012). The Productivity Advantages of Large Cities: Distinguishing Agglomeration From Firm Selection. Econometrica, 80 (6), 2543-2594. http://dx.doi.org/10.3982/ECTA8442
Date Posted: 27 November 2017
This document has been peer reviewed.