The Increasing Importance of Agglomeration Economies Hidden behind Convergence

Abstract

Recent studies have found that knowledge production grows faster in cities lagging behind than it does in traditionally leading cities, which implies convergence in knowledge production. On the other hand, there is also evidence that larger cities are more efficient in knowledge production—i.e. agglomeration economies—which is likely to cause divergence. This paper attempts to reconcile these two seemingly contradictory findings by estimating a simple econometric model, using the US patent records between 1975 and 2005. It is found that convergence occurs among cities of similar size (horizontal convergence), while divergence occurs between larger cities and smaller cities (vertical divergence). The former dominates the latter, leading to the net effect of overall convergence. It is also found that the divergence is attributable to the fact that the agglomeration economies that previously existed have become even larger over time.