Agglomeration

“One of the biggest meta-ideas of modern life is to let people live together in dense urban agglomerations. A second is to allow market forces to guide most of the detailed decisions these people make about who they interact with each other. Together, the city and the market let large groups of people cooperate by discovering new ideas, sharing them, and learning from each other. The benefits can show up as a new design for a coffee cup or wages for a worker that grow with experience acquired in jobs with a sequence of employers.” — Romer

The benefits of agglomeration have been high with labor pools, better wages, and knowledge spillovers. Throughout history there have been productive clusters, across multiple disciplines. People across different fields knew and credited each other. It couldn’t be that it was an accident that these clusters were so dense with ideas and people, that lasted generations. A few examples in just modern history:

• Florence: Leonardo da Vinci, Michelangelo, Sandro Botticelli, Lorenzo Ghiberti, Filippo Brunelleschi, Donatello, Raphael, and others.
• Edinburgh: David Hume, Adam Smith, Adam Ferguson, Joseph Black, James Hutton, John Playfair, and others.
• Vienna: Ernst Mach, Karl Popper, Ludwig Wittgenstein, Kurt Godel, F. A. Hayek, Carl Menger, Ludwig von Mises, Joseph Schumpeter, Sigmund Freud, Max Adler, Gustav Klimt, Adolf Loos, Johannes Brahms, Gustav Mahler, Johann Strauss, and others.
• Calcutta: Rabindranath Tagore, Satyajit Ray, Satyendra Nath Bose, Prasanta Chandra Mahalanobis, Prafulla Chandra Ray, Jagadish Chandra Bose, Sisir Kumar Mitra, and others.
• Berlin: Albert Einstein, Max Planck, Walter Nernst, James Franck, Max von Laue, Leo Szilárd, Eugene Wigner, John von Neumann, Dennis Gabor, Ludwig Mies van der Rohe, Yehudi Menuhin, George Grosz, Vladimir Nabokov, and others.

It seems like we are missing a huge opportunity not working nearly hard enough to build new clusters.

• “In a counterfactual scenario where the quality of U.S. inventors is held constant but their geographical location is changed so that all cities have the same number of inventors in each field, inventor productivity would increase in small clusters and decline in large clusters. On net, the overall number of patents produced in the US in a year would be 11.07% smaller.” — Moretti
• “…wages in large cities are higher not only because large cities attract more high-quality workers, but also because high-quality workers are significantly more likely to be matched to high-quality plants within each city. Assortative matching is significantly stronger in large cities and the elasticity of assortative matching with respect to city size has increased by 75% in the last 30 years.” — Dauth, Findeisen, Moretti, Suedekum
• “… we use new information on output per worker at the metropolitan area level along with a measure of density that accounts for the spatial distribution of population within metropolitan areas 24 to estimate a model of aggregate urban productivity in which the agglomeration effect of density is enhanced by a metropolitan area’s stock of human capital. On average, we find that a doubling of density increases metropolitan area productivity by 2 to 4 percent”. “Consistent with theories of learning and knowledge spillovers in cities, we demonstrate that the elasticity of average labor productivity with respect to density increases with human capital.” — Abel, Dey, Gabe
• “As agglomeration size doubles, wages rise by approximately five percent in the U.S. and Brazil, but the link is much larger in India and China.” The urban to rural earnings gap is 45% in China, 122% in India, and 176% (!) in Brazil. — Glaeser, Xiong
• “Collocation of different firms in the same geographic area can lead to inter-firm spillovers. Similarly, collocation of sister establishments in the same geographic area can lead to intra-firm spillovers. These intra-firm spillovers can have large effects on how establishments operate and perform.” — Rawley, Seamans
• A meta paper by Carlino & Kerr that goes through more literature and findings.

In general, intra-firm agglomeration seems understudied, please email if you have suggestions or comments on that or any of the above.