Agglomeration Elasticities in New Zealand

This paper analyses the relationship between firms’ multi-factor productivity and the effective employment density of the areas where they operate. Quantifying these agglomeration elasticities is of central importance in the evaluation of the wider economic benefits of transport investments. We estimate agglomeration elasticities using the Statistics New Zealand prototype Longitudinal Business Database: a firm-level panel covering the period 1999 to 2006. We estimate that an area with 10 percent higher effective density has firms with productivity that is 0.69 percent higher, once we control for the industry specific production functions and sorting of more productive firms across industries and locations. We present separate estimates of agglomeration elasticities for specific industries and regions, and examine the interaction of agglomeration with capital, labour, and other inputs.