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

• 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
• Institution: Singapore Management University

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.