Why do businesses grow faster in urban areas than in rural areas?

Why do businesses grow faster in urban areas than in rural areas?

We document that growth of business earnings is mostly observed among young firmsin metro areas. Three explanations are considered: metro areas attract more-productiveentrepreneurs, and reaching the optimal size takes time due to borrowing constraints;metro areas provide better learning opportunities...

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Bibliographic Details
Main Authors: LEE, Jungho, XU, Jianhuan
Format: text
Language:English
Published: Institutional Knowledge at Singapore Management University 2020
Subjects:
Firm Dynamics
Firm Sorting
Borrowing Constraint
Firm Learning
Firm Selection
Urban Economy
Growth and Development
Industrial Organization
Online Access:https://ink.library.smu.edu.sg/soe_research/2027
https://ink.library.smu.edu.sg/context/soe_research/article/3026/viewcontent/region_firm_growth.pdf
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Institution: Singapore Management University
Language: English
Description
Summary:We document that growth of business earnings is mostly observed among young firmsin metro areas. Three explanations are considered: metro areas attract more-productiveentrepreneurs, and reaching the optimal size takes time due to borrowing constraints;metro areas provide better learning opportunities; and high operating costs in metroareas allow only the productive firms to survive. We use a firm-dynamics model with alocation choice to quantify the extent to which the three theories explain the data. Wefind the first two theories largely explain the high growth among metro, young firms. Ourmodel also suggests the distortion in entrepreneurs’ location choice can induce substantialwelfare loss.

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