SEMINAR CANCELLED On the Productivity Advantage of Cities

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 entirely driven by higher prices charged with no significant differences in TFP across space related to density. 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 increasing with density: more (less) productive firms sell proportionally more (less) if located in a denser area. These correlation patterns thus amplify in aggregate regional-level figures any firm-level differences in productivity across space. Joint with Nick Jacob.