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Market Thickness, Input-Output Linkages, and Agglomeration

Yuhei Miyauchi and Daisuke Miyakawa

Discussion papers from Research Institute of Economy, Trade and Industry (RIETI)

Abstract: Existing literature documents strong empirical relationships between input-output linkages and geographic concentration of industries. This paper empirically assesses one micro-foundation of this phenomenon: geographic concentration of firms reduces the matching friction of firm-to-firm trade (i.e., thick-market externality). Using a panel of over one million firms in Japan with dynamic supply-chain linkage information, we find that (1) firms have more suppliers and customers in denser areas on average, and (2) when a supplier exits the market for unexpected reasons (identified by the reported reasons of bankruptcy), firms recover alternative suppliers more in thicker supplier markets. These two pieces of evidence suggest the importance of thick-market externality of firm-to-firm trade as a mechanism of agglomeration.

Pages: 20 pages
Date: 2017-05
New Economics Papers: this item is included in nep-bec, nep-dcm, nep-geo and nep-ure
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Persistent link: https://EconPapers.repec.org/RePEc:eti:dpaper:17072

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