Is Productivity Advantage of Cities Really Down To Mean and Variance?
TLDR
This paper validates a key assumption in urban economics, showing city productivity gains stem from agglomeration, not just firm selection.
Key contributions
- Validated the critical TFP distribution assumption in urban productivity models using Spanish firm data.
- Found TFP distributions are statistically identical up to mean, variance, and left-tail truncation.
- Showed mean and variance suffice to capture TFP differences across all economic sectors.
- Implies city productivity gains are driven by agglomeration, not stronger firm selection.
Why it matters
This paper provides crucial empirical validation for a widely used methodology in urban economics. By confirming that city productivity advantages are primarily due to agglomeration, it offers clear guidance for policymakers. The findings suggest focusing on policies that foster agglomeration rather than those targeting firm selection.
Original Abstract
Firms in denser areas are more productive, a pattern attributed to agglomeration economies and firm selection. To disentangle these two channels, the popular approach of Combes et al. (2012, ECTA) critically assumes that total factor productivity (TFP) distributions between denser and less dense areas are the same up to mean, variance, and left-tail truncation. We empirically validate this assumption using Spanish administrative firm-level data and recent econometric methods adapted to noisy TFP estimates. Our results find that TFP distributions are indeed statistically identical up to these parameters, validating the use of such productivity decompositions. Furthermore, using only the mean and variance is sufficient to capture differences for all sectors. Accordingly, the productivity advantage of cities may be entirely due to agglomeration rather than stronger selection, suggesting that policymakers should focus on policies targeting agglomeration. Finally, our approach extends to related contexts like differences in worker skill distributions.
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