Research themes

Firms and workers are much more productive in large cities than in other locations. It is also in large cities where the vast majority of substantial innovations emerge. The productivity advantages of cities and urban clusters with a high density of firms and workers have been known for a long time. Many modern econometric studies have confirmed and quantified this important stylized fact.

There have been substantial recent advances in our understanding of the productivity advantages of cities, and the researchers participating in this project have played a key role in those advances at an international level. However, there are four aspects we still do not know enough about and which are fundamental to understand the sources of the productivity advantages of cities and to put local policies on a firmer footing. The four research themes contained in our program focus on those aspects, which we now discuss in further detail.

Theme 1. Separating selection from agglomeration economies

Traditionally the productivity advantages of cities have been attributed to so-called agglomeration economies. These are due to, for instance, the possibility of similar firms sharing suppliers, the existence of thick labour markets facilitating the matching between firms and workers, the benefits of a more stable market where firm-level shocks get ironed out, or the possibility to learn from the experiences and innovations of others. However, recent theoretical advances point out that the apparent productivity advantages of cities may be due to a Darwinian selection process, whereby tougher competition in larger markets allows the survival of only the more productive firms, rather than to some type of agglomeration externality. Thus, a first goal of this project is to develop a general equilibrium model that combines agglomeration and selection. This nested model will serve as a basis to develop an empirical strategy able to distinguish, using individual plantlevel data, between mechanisms of agglomeration and mechanism of selection.

Theme 2. Distinguishing alternative agglomeration mechanisms

In as far as the productivity advantages of cities are, at least partly, due to agglomeration economies, it is important to distinguish the precise mechanism through which they operate. All possible mechanisms have a common prediction that has been the focus of the literature: aggregate scale economies implying that production in more dense locations increase more than proportionately in the quantity of inputs. It is crucial to obtain more precise predictions from theoretical models that allow us to distill, though detailed econometric studies, those mechanisms that are relevant in practice. Furthermore, the static aspects of agglomeration are much better understood than the dynamic ones. The presumption of the more descriptive literature that the main advantages of cities are dynamic in nature, in particular when it comes to innovation, has not yet been subject of sufficient indepth theoretical and empirical analysis. Our research project will also analyze the extent to which larger urban centres facilitate investments in innovation, as well as the growth effects of joint R&D efforts with foreign firms. We will also explore the extent to which the productivity advantages of certain locations are related to cultural and institutional aspects.

Theme 3. Local growth and agglomeration in young and mature industries

Traditionally spatial clusters of economic activity have been studied in isolation. However, recent studies suggest a growing interaction between cities and an increasing specialization of cities by functions, rather than by sectors. Another goal is therefore to understand these interactions between cities, in particular the very different recent evolution in the spatial distribution of manufacturing and services.

Theme 4. Geography, institutions, and development

While second-nature geography (the location of firms and workers with respect to each other) is clearly important, we must not forget the role of first-nature geography (physical geography and the location of countries, regions and cities on the globe) for economic outcomes. Is geography fate or can regions overcome a poor geographic endowment? Does physical geography matter directly for its effects on economic outcomes or indirectly through its interaction with key historical events and the development of institutions? This fourth research theme aims to answer these questions investigating the relationship between physical geography, institutions, spatial concentration, and economic development.