The Role of Cities: Evidence From the Placementof Sales Offices

What is the force of attraction of cities? Leading explanations include the advantages of a concentrated market and knowledge spillovers. This paper develops a model of firm location decisions in which it is possible to distinguish the importance of the concentrated-market motive from other motives, including knowledge spillovers. A key aspect of the model is that it allows for the firm to choose multiple locations. The theory is applied to study the placement of manufacturing sales offices. The implications of the concentrated-market motive are found to be a salient feature of U.S. Census micro data. The structural parameters of the model are estimated. The concentratedmarket motive is found to account for approximately half of the concentration of sales offices in large cities. ∗Address: Dept. of Economics, 1035 Heller Hall, University of Minnesota, Minneapolis, MN 55455; Email: [email protected]. I acknowledge support from NSF grant SES-9906087 for funding this project. I thank the Center for Economic Studies at the U.S. Census Bureau for making it possible for me to access the Census data. I thank Adam Copeland for his research assistance. I am grateful for helpful comments from numerous seminar participants. I particularly want to thank Zvi Eckstein, Gautam Gowrisankaran, Joe Harrington, Shawn Klimek, Sam Kortum, Ariel Pakes, Arnie Resnik, and Jim Schmitz for detailed comments or help. The views expressed herein are those of the author and not necessarily those of the Federal Reserve Bank of Minneapolis, the Federal Reserve System, or the National Science Foundation.