Quantifying agglomeration and dispersion forces.

• Author: Redding, Stephen J.
• Position: Research Summaries

Economic activity is highly unevenly distributed across space. In the United States, the 2,000 counties with the lowest employment densities account for over 75 percent of land area but less than 12 percent of employment. By contrast, the 100 counties with the highest employment densities make up around 40 percent of employment but less than 2 percent of land area. A fundamental research question in economic geography is the extent to which this uneven distribution of economic activity reflects differences in location fundamentals, such as natural resources, mountains and navigable water, or agglomeration forces, such as knowledge externalities.

Understanding the strength of agglomeration forces and of corresponding dispersion forces is central to a range of economic and policy questions. These forces influence economic efficiency, the size distribution of cities, and the organization of economic activity within cities. They have implications for the level and distribution of income and for local and aggregate productivity. They also determine the impact of public policy interventions, such as transport infrastructure investments, local taxation, and regional development programs.

Although the literature on economic geography and urban economics dates back at least to the work of Alfred Marshall in the late 19th century, separating agglomeration and dispersion forces from variation in location fundamentals remains challenging. While high land prices and levels of economic activity in a group of neighboring locations are consistent with strong agglomeration forces, they are also consistent with shared amenities that make these locations desirable places to live or common natural advantages that make these locations attractive for production.

This challenge has both theoretical and empirical dimensions. From a theoretical perspective, to develop tractable models of location choice, much existing research makes simplifying assumptions such as a small number of symmetric locations, which ignores the important differences in location fundamentals that are observed in practice and limits the usefulness of these models for empirical work. From an empirical perspective, the challenge is to find exogenous sources of variation in the surrounding concentration of economic activity to help disentangle agglomeration and dispersion forces from variation in location fundamentals. Part of my research program has sought to overcome these challenges and quantify the magnitude of agglomeration and dispersion forces.

The Costs of Remoteness

In the presence of trade costs, the location of agents relative to one another in geographic space determines their access to one another's markets, which in turn affects consumption, production, and income. Anthony Venables and I used a theoretical model of economic geography to derive theoretically consistent measures of market access that can be structurally estimated using observed bilateral trade data between...