How Local are Spatial Density Externalities? Neighbourhood Effects in Agglomeration Economies

Andersson M., Klaesson J. and Larsson J. P. How local are spatial density externalities? Neighbourhood effects in agglomeration economies, Regional Studies. The geographic scale at which density externalities operate is analysed in this paper. Using geocoded high-resolution data, the analysis is focused on exogenously determined within-city squares (‘neighbourhoods’) of 1 km2. The analysis confirms a city-wide employment density–wage elasticity and an economically significant density–wage elasticity at the neighbourhood level that attenuate sharply with distance. Panel estimates over 20 years suggest a neighbourhood density–wage elasticity of about 3%, while the city-wide elasticity is about 1%. It is argued that the neighbourhood level is more prone to capture learning, e.g. through knowledge and information spillovers. This interpretation is supported by (1) significantly larger neighbourhood elasticities for university educated workers and (2) sharper attenuation with distance of the effect for such workers.