Evidence on the nature and sources of agglomeration economies

TLDR

Urban agglomeration economies arise from industrial, geographic, and temporal externalities that weaken with distance and are driven by labor‑market pooling, input sharing, knowledge spillovers, natural advantage, home‑market effects, consumption opportunities, and rent‑seeking. Empirical evidence confirms the presence of labor‑market pooling, input sharing, and knowledge spillovers as key sources of agglomeration economies.

Abstract

This paper considers the empirical literature on the nature and sources of urban increasing returns, also known as agglomeration economies. An important aspect of these externalities that has not been previously emphasized is that the effects of agglomeration extend over at least three different dimensions. These are the industrial, geographic, and temporal scope of economic agglomeration economies. In each case, the literature suggests that agglomeration economies attenuate with distance. Recently, the literature has also begun to provide evidence on the microfoundations of external economies of scale. The best known of these sources are those attributed to Marshall (1920): labor market pooling, input sharing, and knowledge spillovers. Evidence to date supports the presence of all three of these forces. In addition, there is also evidence that natural advantage, home market effects, consumption opportunities, and rent-seeking all contribute to agglomeration.