An alternative approach to estimating agglomeration and productivity using geography, demography and evidence from satellite imagery

Abstract

ABSTRACT In this article we combine novel geographical, demographic and satellite data with an instrumental variables (IVs) estimation approach to tackle a thorny set of data and econometric issues. Studies of agglomeration effects on economic productivity at the city scale have been growing in popularity in both the literature and the interests of urban policymakers in recent years. Despite growing sophistication in econometric approaches, underlying weaknesses in the quality and availability of data at the city scale have hindered efforts to unravel the endogeneity issues, or circularity between city scale, amenity and productivity. We set out both to extend the agglomeration literature to the case of Australia – which hitherto has been lightly studied in this field – and to take advantage of Australia’s unique geography and reliance on migration to drive population change. We also draw on satellite data measuring night-time luminosity as a proxy for economic productivity. We demonstrate the construction of convincing and robust IVs that proxy for population at the city scale. Our econometric estimates indicate that a 1% increase in city populations causes productivity to be enhanced by 0.24–1.70% on average.