Agglomeration

by

Tomoya Mori

• LAST REVIEWED: 24 August 2023
• LAST MODIFIED: 15 October 2020
• DOI: 10.1093/obo/9780190922481-0041

Introduction

Agglomeration of economic activities is the phenomenon that has been observed since humans shifted from migratory life to sedentary life after the spread of farming. Urban agglomerations continue today, and the economy of developed countries is typically dominated by cities. Naturally, agglomeration has been one of the major research topics in urban and regional economics. The formal modeling of agglomeration started in 1970s and grew rapidly thereafter. It first focused on the endogenous city formation; in particular, the formation of the central business district within a city, the presence of which has been treated as exogenous in the classical urban economics. The formation of multiple cities and the agglomeration of more general economic activities as well as their spatial coordination were studied in more recent years. Given the economic integration that took place in different parts of the world in the 1990s and thereafter, today agglomeration has become a common keyword in characterizing not only urban and regional economy, but also international economy.

Overview

According to United Nations 2019, the urban share of the world population has increased from less than 30 percent in 1950 to 55 percent in 2018. The share is higher in more developed regions: for example, 74 and 82 percent in Europe and North America. Major cities typically form at some naturally advantageous locations, such as the locations of natural ports. However, such cities often continue to prosper even after the original advantage of the location disappeared. That is, the agglomeration is locked in at its initial location due to the second nature advantage accruing from positive agglomeration externalities. Bleakley and Lin 2012, Michaels and Rauch 2018, and Redding, et al. 2011 show evidence for such “lock-in” effects in the United States, France, and Germany, respectively. This article provides an overview of the formal and empirical researches of agglomeration, with a focus on endogenous mechanism of agglomeration. Consider a closed economy with positive transport costs for products but with no relocation costs for agents. Then, there is no competitive equilibrium involving transportation of goods, if location space is homogeneous, and complete markets exist for all goods everywhere. The only equilibrium possible under these conditions is characterized by the autarky at each location. Starrett 1978 establishes this result, which was reinterpreted in Fujita 1986 as the Spatial Impossibility Theorem from the viewpoint of agglomeration. It implies that the formation of agglomeration is associated with at least one of the following: (i) heterogeneous location space, (ii) non-market spatial externalities, (iii) imperfect competition with scale economies. In other words, to explain endogenous agglomeration, one must violate at least one of these three conditions.

• Bleakley, Hoyt, and Jeffrey Lin. “Portage and Path Dependence.” The Quarterly Journal of Economics 127.2 (2012): 587–644.

  DOI: 10.1093/qje/qjs011

  Evidence for the look-in effect of city formation is shown by utilizing the case of cities formed along the fall line in the southeastern United States which marks the final rapids on rivers before the ocean. In the past, the portage sites along the fall line attracted population agglomeration, hence large cities were formed there. Many of these cities remain still large today even after the initial advantage of location as portage sites disappeared.

• Fujita, Masahisa. “Urban Land Use Theory.” In Location Theory. Edited by Jean J. Gabszewicz, Jacques-François Thisse, Masahisa Fujita, and Urs Schweizer, 86–163. Abingdon, UK: Harwood Academic, 1986.

  Based on the results obtained by Starrett 1978, Fujita classified the fundamental source of agglomeration force into the above three types i–iii. His classification of agglomeration force gives the basis for theoretical modelings of agglomeration in later years.

• Michaels, Guy, and Ferdinand Rauch. “Resetting the Urban Network: 117-2012.” Economic Journal 128.608 (2018): 378–412.

  DOI: 10.1111/ecoj.12424

  This paper shows evidence for the lock-in of city locations by comparing the impact of the collapse of the Western Roman Empire on British and French cities. It finds a strong contrast between the two countries in that a substantially larger subset of cities was replaced in Britain than in France after the event. New cities in Britain were found at the new advantageous locations at the ports, reflecting the improved navigation technology, while many French cities remained despite their less advantageous locations under the new technology.

• Redding, Stephen J., Daniel M. Sturm, and Nikolaus Wolf. “History and Industry Location: Evidence from German Airports.” The Review of Economics and Statistics 93.3 (2011): 814–831.

  DOI: 10.1162/REST_a_00096

  This paper shows evidence for the multiplicity of equilibria regarding the airport location in Germany before and after the division and reunification of Germany after World War II. In particular, the division shifted the airport from Berlin to Frankfurt, and it stays there locked-in even after the reunification. Since the operation of an airport is subject to large physical scale economies as well as positive externalities in transportation, it can be considered as an instance of lock-in effect.

• Starrett, David. “Market Allocations of Location Choice in a Model with Free Mobility.” Journal of Economic Theory 17.1 (1978): 21–37.

  DOI: 10.1016/0022-0531(78)90120-5

  This paper established the Spatial Impossibility Theorem (named by Fujita 1986, p. 127) which delineates the condition for the absence of agglomeration, which in turn suggests a necessary condition for endogenous agglomeration.

• United Nations. World Urbanization Prospects (2018 revision). New York: United Nations, 2019.

  This annual report provides an overview of the level of urbanization and its prospect all over the world.