Productivity, Place, and Plants
Why do cities differ so much in productivity? Using a split-sample IV strategy, we document that up to three quarters of the large measured dispersion in productivity across US cities is spurious and reflects the "luck of the draw" of idiosyncratically heterogeneous plants. Due to this granularity bias, economies with randomly reallocated plants exhibit nearly as high a variance as the empirical economy. For new plants, four fifths of the raw dispersion reflects granularity bias, and their productivity is only imperfectly correlated with that of older plants, which dominate measured productivity levels. These US-based patterns broadly extend to European countries.
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