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Firm Sorting and Agglomeration

Cecile Gaubert

NBER Working Paper No. 24478
Issued in April 2018
NBER Program(s):International Trade and Investment

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.

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Document Object Identifier (DOI): 10.3386/w24478

Published: Cecile Gaubert, 2018. "Firm Sorting and Agglomeration," American Economic Review, vol 108(11), pages 3117-3153.

 
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