Agglomeration economies andtransport investment

Dr Dan Graham
Imperial College London
d.j.graham@imperial.ac.uk

Transport and agglomeration economies•

Agglomeration economies – positive externalities thatderive from spatial concentration–•

Transport / generalised costs of travel are crucial toagglomeration:–––•
2e.g. knowledge / technology sharing, specialization, labour
market pooling, increase in market scale, sharing markets for
inputs and outputs etc.

transport (costs) in part determines economic densities:
accessibility
transport constraints can inhibit agglomeration economiesnew investment changes the density or concentration ofactivity (including labour) accessible to firms

Agglomeration is an externality / market imperfection as such it is not captured in a standard appraisal.

Venables model of infrastructure investment,
agglomeration and productivity

3

Venables model of infrastructure investment,
agglomeration and productivity

4

Measurement and estimation of agglomeration

5•

To evaluate agglomeration benefits we need estimatesof elasticities of productivity w.r.t agglomerationi.

Construct a national database of information about theproductivity of firms across all economic sectors.

ii.

Locate firms geographically in a GIS.

iii.

Construct measures of the agglomeration ‘experienced’ byeach firm in each location - compatible with use in transport
appraisal.

6

7

Measurement and estimation of agglomerationiv.

The total effective density that is accessible to any firm
located in area i isi j

Uj

jd ij

EDi

where U is some measure of activity (i.e. employment orpopulation) and dij is the distance between areas i and j.
––––v.

8captures scale and proximity
highly flexible spatial framework
incorporates an implicit transport accessibility dimension
replace distance with travel times, generalized costs etc.

Estimation using the translog system – allows a flexible
comprehensive model of production.

Results – agglomeration elasticities

9industryelasticity

Manufacturing

0.077

Construction

0.072

Distribution, hotels & catering

0.153

Trans, storage& communications

0.223

Real estate

0.192

IT

0.082

Banking, finance & insurance

0.237

Business services

0.224

Whole economy

0.119Results - 1•

Positive and significant impact from urban density formost but not all sectors of the economy•

The magnitude of the agglomeration elasticity varies
substantially across industries•

No agglomeration economies for primary industries•

Mixed evidence for manufacturing industries about theeffect and strength of agglomeration economies•

Average manufacturing elasticity of 0.077 – comparesreasonably well to previous estimates.

10Results - 2• Positive and significant agglomeration elasticities for mostservice industries.
• An increase of 20% in service sector productivity with adoubling of city size
– 24% for Financial services– 22% for Business services• On average an increase of 12% in total economic
productivity with a doubling of city size (density).
• Evidence also of diminishing returns to agglomeration andof diseconomies, including congestion.
11Applying the new appraisal to CrossRail (DfT calculations)Benefits

12

Welfare (£ million)

Business time savings

4,847

Commuting time savings

4,152

Leisure time savings

3,833

Total user benefits(conventional)

12,832Agglomeration benefits

2,440

Total benefits (inc agglom)

15,272

Appraisal of additional benefits from agglomeration

13

ModeSchemeAgglomeration

RailCrossrail

19%

Road

Leeds to Bradford Improved Highway

21%

Road

Leeds Urban Area Improved Highway

22%

PT

Leeds to Bradford PT Improvements

15%

Bus

Intra Leeds bus subsidy

11%

Road

Leeds to Sheffield Improved Highway

19%

Road

M6 shoulder

12%

Bus

West Yorkshire County bus subsidy

9%PT

Leeds Urban Area Major PT Investment

9%

Bus

South & West Yorkshire Bus subsidy

7%

Bus

South Yorkshire bus subsidy.

3%

Conclusions• Agglomeration economies exist in most industries –particularly services – and can have a substantial impact onproductivity.
• Transport investments change the level of agglomeration
experienced by firms and consequently give rise toexternalities that are not captured in a standard cost benefit
appraisal.
• The effect of agglomeration externalities is not trivial when
considered in the appraisal framework - initial appraisals
typically indicate additions of 10%-20% to standard user
benefits.
14

Estimation issues and future directions for empiricalresearch• Endogeneity in agglomeration-productivity relationship.
• Omitted variables / unobserved heterogeneity.
• Sources of agglomeration and journey purposes –relative productivity effects arising from labour market
pooling, economic interactions, freight movements.
• Geographic scope of agglomeration – alternative
measures to test assumptions underpinning distancedecay.
15