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

Publication date: Available online 20 January 2020Source: Regional Science and Urban EconomicsAuthor(s): Jungho Lee, Jianhuan XuAbstractWe document that the growth rate of business earnings among young firms is significantly higher in metro areas than in non-metro areas. Agglomeration economies and firm selection (less productive firms are more likely to exit in metro areas) are known to explain a part of the productivity growth in urban areas, but less is known about the role of borrowing constraints. By developing a firm-dynamics model with a location choice, we show borrowing constraints interact with growth and location choices of firms, and contribute to a substantial part of the observed growth-rate difference between urban and rural young firms. Our model suggests the distortion in location choice due to borrowing constraints can induce non-trivial welfare loss.
Source: Regional Science and Urban Economics - Category: Science Source Type: research