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Chapter 6: Agglomeration, Productivity and Regional Growth: Production Theory Approaches
Jeﬀrey P. Cohen and Catherine J. Morrison Paul 6.1 Introduction One deﬁnition of agglomeration economies is that ‘cost reductions occur because economic activities are located in one place’ (McDonald and McMillen, 2007), an idea typically attributed to Marshall (1920). Ohlin (1933) more speciﬁcally categorized agglomeration economies by distinguishing localization economies and urbanization economies, which has become a standard in the urban economics literature. Localization economies involve beneﬁts to ﬁrms from expansion of their own industry, resulting in industry ‘clusters’. Urbanization economies occur when expansion of an urban area beneﬁts ﬁrms from the proximity of a variety of industries, leading to regional growth. Both of these types of agglomeration economies, arising respectively from geographic concentration of ‘specialized’ and ‘diverse’ production, imply lower costs in real terms rather than in nominal terms for ﬁrms. However, because they result from factors beyond the control of individual ﬁrms, agglomeration economies are often theoretically modeled as external scale economies. The ‘causes’ of agglomeration economies may take a variety of forms. For example, proximity of ‘like’ ﬁrms may increase the quantity or quality of the labor pool so better matches or less risk are involved in hiring; proximity of suppliers may involve easier access to or lower costs of materials inputs; or proximity of population concentrations may facilitate distribution of products. These speciﬁc channels explaining clustering, as has been discussed at length in the agglomeration economies literature (and summarized by Rosenthal and Strange, 2004), are often called the ‘micro-foundations’ underlying...
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