Dynamic Market Size : From Local Externalities to Macroeconomic Outcomes

Can agglomeration and congestion externalities have a significant impact on aggregate outcomes? We can better understand how these two forces interact by examining their dynamic effect at the local level. To study this relationship, I use a panel SVAR structure and a shift-share instrument to analyze the short-, medium-, and long-term effects of a 1% increase in migration to US commuting zones. I construct the instrument using lagged birth rates from the areas that sent migrants each year. The estimates show that these inflows have positive and persistent effects on wages and productivity, though the magnitude of these responses depends on both time and population density. This suggests that the positive and negative spillovers of market size appear at different points following the shock, depending on factors such as housing supply and mobility costs. To explore the potential aggregate repercussions of these local factors, I construct a dynamic spatial economic model that accounts for migration frictions and skill heterogeneity. I then estimate the model parameters using the structural impulse responses from the panel SVAR and consider a range of counterfactual scenarios that varies the degree of congestion and agglomeration forces across different locations