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On the productivity advantage of cities

Author

Listed:
  • Jacob, Nick
  • Mion, Giordano
Abstract
Ever since Marshall (1890) agglomeration externalities have been viewed as the key factor explaining the existence of cities and their size. However, while the various micro foundations of agglomeration externalities stress the importance of Total Factor Productivity (TFP), the empirical evidence on agglomeration externalities rests on measures obtained using firm revenue or value-added as a measure of firm output: revenue-based TFP (TFP-R). This paper uses data on French manufacturing firms' revenue, quantity and prices to estimate TFP and TFP-R and decompose the latter into various elements. Our analysis suggests that the revenue productivity advantage of denser areas is mainly driven by higher prices charged rather than differences in TFP. At the same time, firms in denser areas are able to sell higher quantities, and generate higher revenues, despite higher prices. These and other results we document suggest that firms in denser areas are able to charge higher prices because they sell higher demand/quality products. Finally, while the correlation between firm revenue TFP and firm size is positive in each location, it is also systematically related to density: firms with higher (lower) TFP-R account for a larger (smaller) share of total revenue in denser areas. These patterns thus amplify in aggregate regional-level figures any firm-level differences in productivity across space.

Suggested Citation

  • Jacob, Nick & Mion, Giordano, 2020. "On the productivity advantage of cities," LSE Research Online Documents on Economics 108436, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:108436
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    File URL: http://eprints.lse.ac.uk/108436/
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    References listed on IDEAS

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    Cited by:

    1. Luigi Buzzacchi & Antonio De Marco & Marcello Pagnini, 2024. "Agglomeration and the Italian North–South divide," Journal of Economic Geography, Oxford University Press, vol. 24(5), pages 707-728.
    2. Kichko, Sergei & Picard, Pierre M., 2023. "On the effects of income heterogeneity in monopolistically competitive markets," Journal of International Economics, Elsevier, vol. 143(C).
    3. Nick Jacob & Giordano Mion, 2023. "The UK's Great Demand and Supply Recession," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 85(5), pages 993-1022, October.
    4. Kauma, Bridget & Mion, Giordano, 2023. "Regional productivity differences in the UK and France: from the micro to the macro," LSE Research Online Documents on Economics 121301, London School of Economics and Political Science, LSE Library.
    5. Spanos, Grigorios, 2022. "Organization & density-related differences in within-firm wage disparities," Regional Science and Urban Economics, Elsevier, vol. 95(C).
    6. Gergely Hudecz & Edmund Moshammer & Thomas Wieser, 2020. "Regional disparities in Europe: should we be concerned?," Discussion Papers 13, European Stability Mechanism, revised 25 Oct 2021.
    7. Kichko, Sergei & Picard, Pierre M., 2024. "Market size, income heterogeneity, and trade," Economics Letters, Elsevier, vol. 235(C).

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    More about this item

    Keywords

    total factor productivity (TFP); density; agglomeration externalities; revenue-based TFP; prices; demand; quality;
    All these keywords.

    JEL classification:

    • R12 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Size and Spatial Distributions of Regional Economic Activity; Interregional Trade (economic geography)
    • R15 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Econometric and Input-Output Models; Other Methods
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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