Working Paper: NBER ID: w24478
Authors: Cecile Gaubert
Abstract: The distribution of firms in space is far from uniform. Some locations host the most productive large firms, while others barely attract any. In this paper, I study the sorting of heterogeneous firms across locations and analyze policies designed to attract firms to particular regions (place-based policies). I first propose a theory of the distribution of heterogeneous firms in a variety of sectors across cities. Aggregate TFP and welfare depend on the extent of agglomeration externalities produced in cities and on how heterogeneous firms sort across them. The distribution of city sizes and the sorting patterns of firms are uniquely determined in equilibrium. This allows me to structurally estimate the model, using French firm-level data. I find that nearly half of the observed productivity advantage of large cities is due to firm sorting. I use the estimated model to quantify the general equilibrium effects of place-based policies. I find that policies that decrease local congestion lead to a new spatial equilibrium with higher aggregate TFP and welfare. In contrast, policies that subsidize under-developed areas have negative aggregate effects.
Keywords: Firm Sorting; Agglomeration; Productivity; Place-Based Policies
JEL Codes: F11; R10; R30
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| firm sorting (L29) | productivity (O49) |
| city size (R12) | firm productivity (D22) |
| local congestion policies (L91) | aggregate TFP (E23) |
| policies targeting smaller cities (R28) | negative aggregate effects (F62) |
| city size (R12) | agglomeration externalities (R11) |
| firm sorting (L29) | aggregate productivity (E23) |
| firm sorting (L29) | productivity elasticity to density (O49) |