Title: Quantifying Agglomeration and Dispersion Forces
Abstract: Economic activity is highly unevenly distributed across space. In the United States, the 2,000 counties with the lowest employment densities account for over 75 percent of land area but less than 12 percent of employment. By contrast, the 100 counties with the highest employment densities make up around 40 percent of employment but less than 2 percent of land area. A fundamental research question in economic geography is the extent to which this uneven distribution of economic activity reflects differences in location fundamentals, such as natural resources, mountains and navigable water, or agglomeration forces, such as knowledge externalities. Understanding the strength of agglomeration forces and of corresponding dispersion forces is central to a range of economic and policy questions. These forces influence economic efficiency, the size distribution of cities, and the organization of economic activity within They have implications for the level and distribution of income and for local and aggregate productivity. They also determine the impact of public policy interventions, such as transport infrastructure investments, local taxation, and regional development programs. Although the literature on economic geography and urban economics dates back at least to the work of Alfred Marshall in the late 19th century, separating agglomeration and dispersion forces from variation in location fundamentals remains challenging. While high land prices and levels of economic activity in a group of neighboring locations are consistent with strong agglomeration forces, they are also consistent with shared amenities that make these locations desirable places to live or common natural advantages that make these locations attractive for production. This challenge has both theoretical and empirical dimensions. From a theoretical perspective, to develop tractable models of location choice, much existing research makes simplifying assumptions such as a small number of symmetric locations, which ignores the important differences in location fundamentals that are observed in practice and limits the usefulness of these models for empirical work. From an empirical perspective, the challenge is to find exogenous sources of variation in the surrounding concentration of economic activity to help disentangle agglomeration and dispersion forces from variation in location fundamentals. Part of my research program has sought to overcome these challenges and quantify the magnitude of agglomeration and dispersion forces. The Costs of Remoteness In the presence of trade costs, the location of agents relative to one another in geographic space determines their access to one another's markets, which in turn affects consumption, production, and income. Anthony Venables and I used a theoretical model of economic geography to derive theoretically consistent measures of market access that can be structurally estimated using observed bilateral trade data between locations. (1) As predicted by economic geography models, these measures of market access are strongly correlated with the observed cross-sectional distribution of economic activity. To provide evidence for a causal role of market access, Daniel Sturm and I used the division of Germany after the Second World War and the reunification of East and West Germany in 1990 as a source of exogenous variation. (2) The key idea behind our empirical approach is that the division caused West German close to the former border between East and West Germany--treatment cities within 75 kilometers of the border--to experience a disproportionate loss of market access relative to other West German cities, our control cities. The reason is that West German close to the East-West border lost nearby trading partners with whom they could interact at low transport costs prior to division. In contrast, the effect on West German further from the East-West border was more muted, because they were more remote from the trading partners lost, and therefore already faced higher transport costs prior to division. …
Publication Year: 2016
Publication Date: 2016-12-22
Language: en
Type: article
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