The association between productivity and size in the New Economic Geography angle and the standard agglomeration literature

When people and firms live side by side in cities and industrial areas, some benefits come to exist out of this coexistence. These benefits are studied under the title of agglomeration economies. In this writing, I will try to figure out the difference between New Economic Geography angle and standard agglomeration literature in suggesting that productivity and size may be directly associated. Also, I will try to interpret rank size rule when applied to city size distribution in a country. 

The agglomeration literature built on the studies of Henderson (1974) and Sveikauskas (1975) posits that firms in large cities are more productive. This increased productivity comes from the indivisibilities in investment, huge infrastructure base, large market size, lower labour turn-over cost, and easy information-sharing that exist in large cities. Combes et al. (2012) furthers the literature by offering two main explanations for the average increased productivity of firms in larger cities. The first explanation involves firm selection that means competition among firms are tough in larger cities and this allows only the most productive to survive. The second explanation involves agglomeration economies which is possibly reinforced by localized natural primacy. The New Economic Geography (NEG) literature, too, discusses the impact of agglomeration on economic growth. According to this strand of literature, migration and population expansion in cities are motivated by the trade-off between increasing returns and mobility costs. According to Krugman (1991), employees and companies become more productive due to the existence of external-scale economies. What makes the New Economic Geography angle different from standard literature produced by urban economists is the level of their analysis: NEG literature analyses the impact of city size or agglomeration on economic growth at the national level while standard agglomeration looks into the impact of city size on the productivity of urban workers at the city level.

Now, let's see the interpretation of the rank size rule when applied to city size distribution in a country. Zipf’s rank size rule suggests that the largest city is roughly twice the size of the second largest city, about three times the size of the third largest city, and so on. This relationship can also be understood and explained as inverted u-shaped relationship between city size and productivity/growth, meaning that initially as city increases in size, productivity of the firms in that city increase. This continues up to a certain point beyond which growth decreases as city increases. The decrease in productivity beyond the threshold limit in the city size would mean that firms will need to look for fresh urban setting in other places in order to make new investment. In the same way, new migrants may not find it worthwhile to migrate to the cities which have already reached an optimum size. 

To sum up, the New Economic Geography angle analyses the impact of city size or agglomeration on economic growth at the national level while the standard agglomeration looks into the impact of city size on the productivity of urban workers at the city level. And, Zipf’s rank size rule can be understood and explained as inverted u-shaped relationship between city size and productivity/growth, meaning that initially as city increases in size, productivity of the firms in that city increase. This continues up to a certain point beyond which growth decreases as city increases. The decrease in productivity beyond the threshold limit in the city size would mean that firms will need to look for fresh urban setting in other places in order to make new investment.

References: 

Henderson, J. (1974). The Sizes and Types of Cities. The American Economic Review, 64(4), 640-656. Retrieved March 27, 2021, from http://www.jstor.org/stable/1813316 

Leo Sveikauskas, 1975. "The Productivity of Cities," The Quarterly Journal of Economics, Oxford University Press, vol. 89(3), pages 393-413. 

Combes, P., Duranton, G., Gobillon, L., Puga, D., & Roux, S. (2012). The Productivity Advantages of Large Cities: Distinguishing Agglomeration From Firm Selection. Econometrica, 80 (6), 2543-2594. http://dx.doi.org/10.3982/ECTA8442 

Krugman, Paul, 1991. "Increasing Returns and Economic Geography," Journal of Political Economy, University of Chicago Press, vol. 99(3), pages 483-499, June.