The Comparative Advantage of Cities

Abstract

What determines the distributions of skills, occupations, and industries across cities? We develop a theory to jointly address these fundamental questions about the spatial organization of economies. Our model incorporates a system of cities, their internal urban structures, and a high-dimensional theory of factor-driven comparative advantage. It predicts that larger cities will be skill-abundant and specialize in skill-intensive activities according to the monotone likelihood ratio property. We test the model using data on 270 US metropolitan areas, 3 to 9 educational categories, 22 occupations, and 21 manufacturing industries. The results provide support for our theory's predictions.

On the spatial scale of industrial agglomerations

“…One is the relation of bilateral distances for individual industries to those of the aggregate industry. As documented by Mori et al [35] and Mori and Smith [36] for Japan and Hsu [20,Appendix] and Davis and Dingel [8] for the US, clustering tends to be spatially coordinated across industries, so that clusters of many of industries tend to coincide in larger cities. (As an extreme case, Tokyo contains clusters of all industries.)…”

Agglomeration Theory with Heterogeneous Agents

“…Within that model, we then derive (a) a spatial equilibrium with sorting, (b) limiting results when the size elasticity of agglomeration economies, E, and the size elasticity of urban costs, γ, are small, as vindicated by the data, and (c) limiting results on the city size distribution when γ/E is close to 1. We then show how our model encompasses or relates to recent models in the literature that have investigated either the sorting of workers Davis and Dingel, 2013;Eeckhout et al, 2014) or the sorting of firms (Baldwin and Okubo, 2006;Forslid and Okubo, 2014;Gaubert, 2014;Nocke, 2006) across locations. Let t 2 ½t,t denote some individual characteristic that is distributed with probability distribution function f(Á) and cumulative distribution function F(Á) in the population.…”

“…On the one hand, locating in a city with more talented entrepreneurs may provide a number of upsides, such as access to cheaper intermediates or higher wages for workers. It may also allow more productive interactions among workers, who learn from each other, especially when the quality of learning depends on the talent of the other agents (Davis and Dingel, 2013). Locating in a place with many talented people may, on the other hand, also have its downsides.…”

“…Whatever the net effect of the pros and cons, it should be clear that, in general, the location decision of any agent is at least partly based on where other agents go-that is, sorting is endogenous to the whole distribution of talent across cities. Sorting when the whole distribution of talent matters is formalized in both and Davis and Dingel (2013). consider that agents sort across cities on the basis of their talent.…”

“…Ongoing work by Davis and Dingel (2014) does this in a multidimensional environment using the tools of assignment theory (Sattinger, 1993;Costinot, 2009). 30 Here, we are interested in the assignment of industries to urban sites.…”