W3: Why Do Firms Cluster Flashcards
Agglomeration economics
The productivity advantages of concentration
Micro foundations of agg economies?
Sharing: intermediate input producers
Sharing: common labor pool
Matching: workers for firms
Learning: knowledge and spillovers
Examples of Agg economies
Dalton: carpets
Silicon Valley: tech
Datang: socks
Costs of clustering?
Price competition
Urban wage premiums
Higher rents
Congestion
Why is clustering beneficial?
Positive externalities (interactions)
For production: lower costs for one firm decreases it for all, as incentive for concentration
Types of agglomeration economies and what they are
Localization: (MAR), within industry externalities, co-location in same sector
Urbanization: between industry externalities, a lot of firms just cluster together
Both supported by Marshall
Carlton 1983 main insight
A 10% increase in industry output increases of number of firms by 4.3%.
Then, talk about estimation and problems for OLS (selection bias, OVB and Reverse causality). Use IV 2SLS
Greenstone et al 2010 reading
Diff and diff: winning vs losing country in trying to get a power plant.
Cause 1 for agg economies: Intermediate inputs
Good produced by one good and used by others.
Cluster why?
Because: Economies of scale (many buyers, large demand, large quantity, lower AC of production).
Example: Buttonmakers.
Trend: leads to competitive advantage and specialization, further economies of scale and very low production costs.
Cause 2 for agg economies: Labour pooling
Benefits: insurance against shocks for all agents (reduces wage and price adjustments for a shock, law of large numbers means weaker shocks)
Frictions such as: search costs costs lowers, reallocations costs lowers, firms pay higher wages. Why? b
Because of specialization
Negative: cost of living and labour poaching
Cause 3 of agg economies: Matching skilled workers
Different skills. Wrong skills, then have to train (cost).
Big clusters have bigger labour markets: higher probability to get better match, lower training costs and thus lower labour costs.
Due to economies of scale, hire more workers. Firms invest in training to close skill gap.
Thus, more workers, better matching and lower training costs.
Cause 4 of agg economies: Learning and spillovers
Codified knowledge: easily accessed and stored (easy to explain).
Tacit knowledge: intuitive knowledge and know how. Esoteric and hard to transfer (locally embedded and require face to face interaction). Face interaction really important!!!
Example: Silicon Valley.
Hard to measure spillovers (invisible and high OVB if measure).
Andrew’s 2020; probation in US decrease patents by 8-18%.
Clustering: better face to face interactions at lower costs. Workers share information with all other firms at closer distances.
Therefore: clustering more knowledge spillovers, more innovation, lower costs of production and higher profits. High skilled intensive industries. (Information sharing and diffusion).
Evidence: 1) Arzaghi (2008): large spillover but at very low distances.
2) Carlton at Kerr (2015): industry small clusters, innovative industries and how spillovers are really localized.
Repeat, 4 reasons for agg economies:
1) Sharing intermediate input producers
2) Sharing: common labour pool
3) Matching: workers to firms
4) Learning: knowledge and spillovers
Result: cluster
Urbanization clusters (big city many different firms).
Sharing: still share intermediate producer of commonly used good/service.
Sharing: labour pool can account for more skills (different members of family can specialize).
Sharing: variety of social activities/leasure and consumption
Matching: social opportunities
Learning: Accumulation of skill and learn from knowledge spillovers (young travel to big cities even if costs of living are high).
