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Abstract
The returns to scale (RTS) parameter of urban production functions often has been used to test for the existence of agglomeration economies in urban areas. The production function has been viewed as a convenient device for bridging the gap between the theory of agglomeration and its measurement. Though the studies in this area recently have become much more refined, additional research has been needed in some of the more basic methodological and procedural issues connected with the empirical implementation of the production function approach. The principal objective of this study is to obtain a more accurate estimate of RTS for the manufacturing sector of urban agglomerations in the U.S. The conclusion is that the economies of agglomeration may be more complex than originally thought and it may be fruitful to examine more closely the underlying factors involved.
Highlights
The returns to scale (RTS) parameter of urban production functions often has been used to test for the existenceofagglomeration economies in urban areas
Though the method is theoreticallysupportable, its empirical implementation has been subject to several limitations: (1) The choiceofproductim function usually has been limited to homogeneous forms, though several studieshaveshowndirectly orhave impliedthatthe parameters of the production function may change with city size
The results pointed to the use of the Ringstad (1974) and Vinod (1972) specifications that have the properties of constant elasticity of substitution (EOS) and nonhomogeneity
Summary
The returns to scale (RTS) parameter of urban production functions often has been used to test for the existenceofagglomeration economies in urban areas. The underlying rationale is seen most clearly in a statement by Kaldor (1970), who referred to agglomeration economies as: Nothing else but the existence ofincreasing returns to scale - using that term in the broadest sense - in production model. While most of these approaches have been quite imaginative and not without merit, if it were possibleitalso wouldbeinstructiveto usea nonhomogeneous production function as a modeling tool to determine whether RTS changewith the size ofthe urban agglomeration. Though the method is theoreticallysupportable, its empirical implementation has been subject to several limitations: (1) The choiceofproductim function usually has been limited to homogeneous forms, though several studieshaveshowndirectly orhave impliedthatthe parameters of the production function (especially RTS) may change with city size. (2) Studies of U.S SMSAs have had to resort to using one-factor models such as the well known Dhrymes variantofthe CBS function
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