DP7191 The productivity advantages of large cities: Distinguishing agglomeration from firm selection

Author(s): Pierre-Philippe Combes, Gilles Duranton, Laurent Gobillon, Diego Puga, Sébastien Roux
Publication Date: March 2009
Keyword(s): agglomeration, cities, firm selection, productivity
JEL(s): C52, D24, R12
Programme Areas: Industrial Organization, International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=7191

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.