Agglomeration, productivity, and spatial spillovers across Chinese cities

This paper investigates the causal relationship between, and the determinants of, urban labor productivity and industrial agglomeration across Chinese cities. We extend the Ciccone and Hall (Am Econ Rev 86(1):54–70, 1996) production density model by distinguishing between the size of the industrial sector and the density of the urban economy in order to examine the effects of industry agglomeration and congestion on urban productivity. We also account for the endogeneity of industrial agglomeration and propose a simultaneous equation model to estimate the determinants of urban productivity and agglomeration. A spatial econometric analysis across 617 Chinese cities in year 2005 shows that the spatial concentration of industrial production is an important cause of higher productivity in large industrial cities and cities in neighboring regions, where higher productivity resulting from concentrated industrial production then leads to further agglomeration in these cities. Controlling for the size of the industrial sector, employment density has a negative effect on urban productivity. We conclude by briefly discussing potential policy implications of the empirical findings.