Cities, Productivity, and Trade

Abstract

We document a novel stylized fact: Using data for several countries, we show that export activity is disproportionately concentrated in larger cities – even more so than overall economic activity. We account for this fact by marrying elements of international trade and economic geography. We build a model with agglomeration economies where firms with heterogeneous productivity sort across city sizes and select into exporting. The model allows us to study the geographic implications of trade policy, as well as the international trade effects of urban policies. We show that (i) lifting restrictions on housing supply raises not only the aggregate productivity of the economy but also its aggregate export intensity, by allowing more firms to locate in larger cities and profit from agglomeration effects; (ii) conversely, while opening up to trade has complex overall economic geography implications, within sectors it tends to shift employment towards larger cities. We structurally estimate the model using data for the universe of Chinese manufacturing firms and study the general equilibrium effects of trade liberalization and of urban policies. We find that the effects of these policies are quantitatively different from those predicted by trade models that ignore economic geography, and by economic geography models that omit international trade (both of which are nested in our framework).