Urban Concentration and Agglomeration Economies: Re-examining the Relationship

Using a sample of 49 countries and two-stage least squares estimators, the effects of urban concentration on economic growth are examined. Evidence is provided that external agglomeration economies in the largest cities have been exhausted, although the process of concentration continues to have a positive impact on output. This effect however is attributed to internal adjustments caused by concentration in factor intensity and marginal factor productivity in the production activities of urban areas. The results suggest that a meaningful policy aiming to alleviate the social costs of concentration in over-populated metropolises without reducing the overall efficiency of the economy, should follow a long-term strategy of developing smaller cities in the periphery and favouring the operation of smaller-scale, less capital-intensive enterprises in the economy.