Agglomeration Economies

Economists have long recognized the importance of urban areas as focal points of economic production and exchange. In recent decades, they have also come to better understand the productivity benefits of firms being located in large urban areas. A variety of advantages may accrue to firms that cluster together in large cities relating, for example, to access to specialized labor, information spillovers, and interactions with customers or suppliers. These types of advantages are often referred to as examples of agglomeration economies in urban areas. Empirically, these gains have been shown to be potentially quite large, with reviews of the literature suggesting that doubling the size of an urban area’s population may be associated with productivity gains on the order of several percentage points. While economic research on this topic has greatly advanced our understanding of the concepts, theory, and likely quantitative implications for urban economies, there has been comparatively little emphasis on the spatial nature of agglomeration economies within urban areas. This is an important distinction, as different sources of agglomeration economies may have different spatial characteristics, and some may be sensitive to transport costs in ways that can be affected by the performance of urban transportation networks. Our research was an effort to link these concepts by operationalizing two specific types of agglomeration economies, localization and urbanization economies, and to investigate their relationship to employment density across several economic sectors within the Twin Cities.The University Metropolitan Consortium supported this researc