Working Paper: NBER ID: w28352
Authors: Antoine Gervais; James R. Markusen; Anthony J. Venables
Abstract: The comparative advantage of many cities is based on their efficiency in the production of ‘functions’, e.g., business services such as finance, law, engineering, or similar functions that are used by firms in a wide range of sectors. Firms that use these functions may choose to source them locally, or to purchase them from other cities. The former case gives rise to cities developing a pattern of sectoral specialization, and the latter a pattern of functional specialization. A two-city country trades with the larger world, and workers within the country are mobile between the two cities. Productivity in a given function varies across cities, giving rise to urban comparative advantage. This may be due to exogenous technological differences (Ricardian) or to city- and function-specific scale economies. Sectors differ in the intensity with which they use different functions, giving rise to a pattern of sectoral and functional specialisation. We generate a number of economic insights, and examine the model’s predictions empirically over a 20-30-year period for US states. As geographic fragmentation costs fall, both our theory and empirical analysis show that sector concentration and regional specialization fall for sectors and rise for functions (occupations).
Keywords: urban specialization; fragmentation costs; functional productivity; sectoral specialization
JEL Codes: F12; F23; R11; R12; R13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| decreasing fragmentation costs (F12) | shift from sectoral to functional specialization (O14) |
| shift from sectoral to functional specialization (O14) | increased functional specialization (L23) |
| decreasing fragmentation costs (F12) | increased functional concentration (D29) |
| sector requiring high intensity of a particular function (R32) | concentrate production in the city where that function is most efficiently produced (R32) |
| sectors that draw evenly on both functions (H44) | fragment production across cities (F12) |
| larger regions (R12) | lower levels of both sectoral and functional specialization (L89) |