Working Paper: CEPR ID: DP14644
Authors: Giordano Mion; Nicholas Jacob
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.
Keywords: Total Factor Productivity; TFP; Density; Agglomeration Externalities; Revenue-Based TFP; Prices; Demand Quality
JEL Codes: R12; R15; D24; L11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| higher prices (D49) | revenue productivity advantage (O49) |
| density (C46) | higher prices (D49) |
| density (C46) | higher quantity sold (D41) |
| firm size (L25) | firm revenue TFP (D22) |
| higher TFPR (F16) | larger share of total revenue (D33) |
| density (C46) | better market allocation of shares (G10) |
| improving productivity in lagging regions (O49) | enhancing product quality and marketing capabilities (L15) |
| urban density (R11) | firm productivity (D22) |