Identifying agglomeration spillovers

"We quantify agglomeration spillovers by estimating the impact of the opening of a large new manufacturing plant on the total factor productivity (TFP) of incumbent plants in the same county. Articles in the corporate real estate journal Site Selection reveal the county where the "Million Dollar Plant" ultimately chose to locate (the "winning county"), as well as the one or two runner-up counties (the "losing counties"). The incumbent plants in the losing counties are used as a counterfactual for the TFP of incumbent plants in winning counties in the absence of the plant opening. Incumbent plants in winning and losing counties have economically and statistically similar trends in TFP in the 7 years before the opening, which supports the validity of the identifying assumption.After the new plant opening, incumbent plants in winning counties experience a sharp relative increase in TFP. Five years after the opening, TFP of incumbent plants in winning counties is 12% higher than TFP of incumbent plants in losing counties. Consistent with some theories of agglomeration, this effect is larger for incumbent plants that share similar labor and technology pools with the new plant. We also find evidence of a relative increase in skill-adjusted labor costs in winning counties, indicating that the ultimate effect on profits is smaller than the direct increase in productivity"--National Bureau of Economic Research web site.