Efficiency of large cities: Theory and empirics

Abstract

The paper assesses the advantages of large cities as places of concentration of economic activity in terms of production efficiency. For this purpose; we made quantitative estimates of the relationship between the size of cities and indicators of productivity. The theory justifies the presence of such relationships by various agglomeration effects; estimates of which have been reduced over the last 20 years as the number of empirical studies has been growing. The calculations are based on Russian municipal statistics; taking into account its limitations. The study has demonstrated that the direction of the relationship between city size and productivity depends on the characteristics of the industry structure of the city economy; which; in turn; depends on the city’s place in the urban hierarchy. A negative relationship is characteristic of highly specialized cities; while a positive one emerges as industry localization declines and diversification of the city economy increases.