Market Thickness, Input-Output Linkages, and Agglomeration

Author Name MIYAUCHI Yuhei (MIT) / MIYAKAWA Daisuke (Hitotsubashi University)
Creation Date/NO. May 2017 17-E-072
Research Project Study on Corporate Finance and Firm Dynamics
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Existing literature documents strong empirical relationships between input-output linkages and geographic concentration of industries. This paper empirically assesses one micro-foundation of this phenomenon: geographic concentration of firms reduces the matching friction of firm-to-firm trade (i.e., thick-market externality). Using a panel of over one million firms in Japan with dynamic supply-chain linkage information, we find that (1) firms have more suppliers and customers in denser areas on average, and (2) when a supplier exits the market for unexpected reasons (identified by the reported reasons of bankruptcy), firms recover alternative suppliers more in thicker supplier markets. These two pieces of evidence suggest the importance of thick-market externality of firm-to-firm trade as a mechanism of agglomeration.