Clustering of firms and workers have long been important factors in urban and regional growth. In recent years, it has become even more apparent – anecdotally and empirically – that this clustering is an integral factor in the vibrancy of large cities (especially in the US). The lack of such agglomeration in smaller to medium-sized cities has precluded them from catching up to their super-city counterparts. The literature on agglomeration economies has demonstrated that the channel for clustering to affect growth occurs through the production function and/or the cost function of individual firms. In addition to summarizing the growing literature on agglomeration economies, this chapter outlines the empirical production theory frameworks that many researchers have utilized to estimate agglomeration economies, and how agglomeration economies are intimately tied to the determination of urban and regional growth.
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