Transactions as a Source of Agglomeration Economies: Buyer-seller matching in the Japanese manufacturing industry

This paper empirically examines whether the geographical proximity of transaction partners improves firms' profits by using actual microdata on inter-firm transactions. I model the formation of transaction partners between newly entering firms and existing ones as a two-sided, many-to-many matching game with transferable utility and estimate the structural parameters of the model. The results show that the average distance to the transaction partners negatively affects firms' structural revenues. This strongly suggests that the existence of agglomeration economies results from inter-firm transactions that occur between geographically close firms. Furthermore, this effect is larger for entrant firms than for existing ones.