Division of Labor and Productivity Advantage of Cities: Theory and Evidence from Brazil


Tian Lin (INSEAD)
3 Apr 2019 (Wednesday)
3:00 - 4:30 pm
LSK6045, Lee Shau Kee Business Building, HKUST, Clear Water Bay, Kowloon

Slides are available here.

Firms are more productive in larger cities. This paper investigates a potential explanation that was first proposed by Adam Smith: Larger cities facilitate greater division of labor within firms. Using a dataset of Brazilian firms, I first document that division of labor is indeed robustly correlated with city size, controlling for firm size. To quantify the importance of division of labor in explaining productivity advantages of cities, I propose and estimate a quantitative model that embeds a theory of firms' choice of the optimal division of labor in a spatial equilibrium framework. In the model, the observed correlation between firm's division of labor and city size is generated by both a selection effect—firms endogenously sort across space, choosing different extents of division of labor—and a treatment effect—larger cities increase division of labor for all firms, by reducing the costs associated with greater division of labor. Exploiting a quasi-experiment that changes the cost of division of labor within cities—the gradual roll-out of broadband internet infrastructure—I validate key model assumptions and and structurally estimate model parameters. Through a counterfactual analysis, I estimate that division of labor contributes to 15% of the productivity advantages of larger cities in Brazil, half of which is due to firm sorting and the other half to the treatment effect of larger city.

This seminar is co-organized with the Department of Economics, HKUST. 

About the Speaker

Lin Tian is an Assistant Professor of Economics at INSEAD. She holds a Bachelor degree in Economics and Statistics, and a Master degree in Statistics from Carnegie Mellon University. She earned her PhD in Economics from Columbia University. 

Professor Tian's research interests include international trade, economic geography, urban economics and public finance. Her current research focuses on studying the factors that contribute to the uneven distribution of economic activities across space. More specifically, she studies the importance of firms’ internal organization, e.g., worker specialization, to the spatial parity in economic development. She also investigates how and why regions vary in their adjustment to changes in local labor-market conditions, such as immigration shocks. In addition, she also studies trade tax in developing countries. In her research, she combines applied theories with well-identified empirical analyses that carefully separate the hypothesized mechanism from confounding factors. 



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