THE MAGNITUDE AND CAUSES OF AGGLOMERATION ECONOMIES∗

ABSTRACT Firms and workers are much more productive in large and dense urban environments. There is substantial evidence of such agglomeration economies based on three approaches. First, on a clustering of production beyond what can be explained by chance or comparative advantage. Second, on spatial patterns in wages and rents. Third, on systematic variations in productivity with the urban environment. However, more needs to be learned about the causes of agglomeration economies. We have good models of agglomeration through sharing and matching, but not a deep enough understanding of learning in cities. Despite recent progress, more work is needed to distinguish empirically between alternative causes.