The benefits and costs of agglomeration: insights from economics and complexity

TL;DR

This paper explores the complex benefits and costs of urban clustering, examining empirical evidence, models, and the implications of urban scaling theory on understanding agglomeration economies.

Contribution

It provides a comprehensive review of empirical observations, measurement challenges, and theoretical models, integrating urban complexity and scaling insights into agglomeration economics.

Findings

Agglomeration economies lead to disproportionate wealth in larger cities.

Both positive externalities and self-sorting contribute to productivity gains.

Urban complexity theory offers new perspectives on agglomeration phenomena.

Abstract

There are many benefits and costs that come from people and firms clustering together in space. Agglomeration economies, in particular, are the manifestation of centripetal forces that make larger cities disproportionately more wealthy than smaller cities, pulling together individuals and firms in close physical proximity. Measuring agglomeration economies, however, is not easy, and the identification of its causes is still debated. Such association of productivity with size can arise from interactions that are facilitated by cities ("positive externalities"), but also from more productive individuals moving in and sorting into large cities ("self-sorting"). Under certain circumstances, even pure randomness can generate increasing returns to scale. In this chapter, we discuss some of the empirical observations, models, measurement challenges, and open question associated with the phenomenon of agglomeration economies. Furthermore, we discuss the implications of urban complexity theory, and in particular urban scaling, for the literature in agglomeration economies.