Complexities in the spatial scope of agglomeration economies

Abstract

This paper argues that the spatial scope of agglomeration economies is more complex than is often assumed in the literature. We provide insight into this issue by showing that agglomeration on short distances (<5 km) does not significantly affect wages, whereas it has a significant and positive effect on medium distances (5–10 km). This effect attenuates rapidly across geographic space, becoming insignificant after 40–80 km. We offer several explanations for this observed distance decay pattern. The results do not imply, however, that nearby agglomeration is irrelevant to the wage formation: only highly urbanized areas benefit from agglomeration on longer distances. Furthermore, this article finds no evidence that foreign economic mass affects wages in the Netherlands, which suggests that national borders are still a substantial barrier for economic interaction.