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Why do businesses grow faster in urban areas than in rural areas?

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  • Lee, Jungho
  • Xu, Jianhuan

Abstract

We document that the growth rate of business earnings among young firms is significantly higher in metro areas than in non-metro areas. Agglomeration economies and firm selection (less productive firms are more likely to exit in metro areas) are known to explain a part of the productivity growth in urban areas, but less is known about the role of borrowing constraints. By developing a firm-dynamics model with a location choice, we show borrowing constraints interact with growth and location choices of firms, and contribute to a substantial part of the observed growth-rate difference between urban and rural young firms. Our model suggests the distortion in location choice due to borrowing constraints can induce non-trivial welfare loss.

Suggested Citation

  • Lee, Jungho & Xu, Jianhuan, 2020. "Why do businesses grow faster in urban areas than in rural areas?," Regional Science and Urban Economics, Elsevier, vol. 81(C).
    • Handle: RePEc:eee:regeco:v:81:y:2020:i:c:s0166046218300917
    DOI: 10.1016/j.regsciurbeco.2020.103521
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