Essays on Firms and Cities

Abstract

This collection of essays investigates the interplay between the localization of a firm and its behavior. In the first chapter, I study how city size shapes firm-level volatility. I develop a dynamic extension of the classical Salop circle framework, in which firm-level volatility is driven by the intensity of local competition and by the level of specialization of firms. Both vary endogenously with market size. The model predicts that firms located in larger markets will experience higher firm-level volatility through these two channels. Using French firm-level data, I document that retailers located in larger cities indeed exhibit higher idiosyncratic volatility.

The second chapter turns to studying how city size shapes the entry and exit patterns of firms. I develop an analytically tractable model of industry dynamics at the level of a city. Larger cities endogenously foster more competition, which leads to a tougher selection of firms. On the other hand, the higher volatility of firms' productivity in larger cities increases the option value of staying active. This fosters the entry of less efficient firms in larger cities and goes against the competition effect. The model proposes a coherent explanation for the two following stylized facts, documented here on a single dataset of French firms. First, minimum productivity thresholds are not related to city size. Second, turnover rates are higher in larger cities.

In the third chapter, I study a spatial equilibrium model in which firms are mobile and can choose the size of the city where to locate. Firms are heterogeneous in productivity, produce in different sectors and can sort into cities of different sizes. The distribution of city sizes and the sorting patterns of firms are uniquely determined in equilibrium. I structurally estimate the model, using French firm-level data. I use the estimated model to quantify the general equilibrium effects of place-based policies, designed to attract firms to particular regions. I find that policies that decrease local congestion lead to a new spatial equilibrium with higher aggregate TFP and welfare. In contrast, policies that subsidize under-developed areas have negative aggregate effects.