Agglomeration Economies and Productivity: A Structural Estimation Approach Using Commercial Rents

We gain more insight into the heterogeneity in firms' productivity regarding agglomeration economies. Given a production function that allows for input factor substitution, we identify ratios of firm-specific production parameters employing a hedonic price approach. We use unique microdata of commercial rents and firm characteristics, and employ semiparametric estimation techniques. The results show that agglomeration economies capitalize in commercial rents. Nevertheless, expenditure on agglomeration is in general limited: for example, it is on average only 5.3% of expenditure on office floor space. It is much higher in some sectors: for retail firms, it is about 20% of the expenditure on floor space. © 2013 The London School of Economics and Political Science.