Working Paper: CEPR ID: DP18522
Authors: Natalie Chen; Dennis Novy; Carlo Perroni; Horng Chern Wong
Abstract: Using firm-level data from France, we document that the shift of economic activity from manufacturing to services over the last few decades has been urban-biased: structural change has been more pronounced in areas with higher population density. This bias can be accounted for by the location choices of large services firms that sort into big cities and large manufacturing firms that increasingly locate in suburban and rural areas. Motivated by these findings, we estimate a structural model of city formation with heterogeneous firms and international trade. We find that agglomeration economies have strengthened for services but weakened for manufacturing. This divergence is a key driver of the urban bias but it dampens aggregate structural change. Rising manufacturing productivity and falling international trade costs further contribute to the growth of large services firms in the densest urban areas, boosting services productivity and services exports, but also land prices.
Keywords: Agglomeration; Cities; Export; Firm Sorting; Manufacturing Productivity; Services; Trade Costs
JEL Codes: F15; F61; R12; R14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| economic activity shift from manufacturing to services (O14) | urban-biased structural change (R11) |
| large cities (R12) | more rapid increase in services share of economic activity (O14) |
| large cities (R12) | slower decline in manufacturing share (O14) |
| behavior of large firms (D21) | urban bias in structural change (R11) |
| large services firms (L84) | located in big cities (R53) |
| large manufacturing firms (L60) | more evenly distributed across city sizes (R12) |
| agglomeration economies (R11) | large services firms attracted to urban areas (R30) |
| congestion costs (L91) | disincentives for large manufacturing firms to remain in densely populated cities (R38) |
| rising manufacturing productivity (O49) | growth of large services firms in urban areas (L84) |
| falling international trade costs (F19) | growth of large services firms in urban areas (L84) |
| agglomeration effects (R11) | concentration of economic activity in urban centers (R11) |
| changes in agglomeration externalities (R11) | contributions to urban-biased structural change (R11) |
| agglomeration effects becoming stronger for services (R12) | concentration of services in urban areas (R23) |
| agglomeration effects becoming weaker for manufacturing (F12) | manufacturing shifts to less populated regions (O14) |
| urban-biased structural change (R11) | dampening overall structural change in the economy (L16) |