Internal agglomeration and productivity: Evidence from microdata

Research Summary: We study how internal agglomeration-geographic clustering of business establishments owned by the same parent company-influences establishment productivity. Using Census microdata on the population of U.S. hotels from 1987-2007, we find that doubling the intensity of internal agglomeration is associated with a productivity increase of about 2% in pre-existing establishments. We consider several mechanisms that may be driving the productivity effect and find evidence consistent with the idea that an economically meaningful component of the productivity effect is due to knowledge transfer between internally agglomerated establishments. We replicate our main findings with Census microdata on the full population of U.S. restaurants from 1987-2007, suggesting that the internal agglomeration effects we document may generalize broadly to other industries with multi-unit firms. Managerial Summary: Internal agglomeration is the geographic clustering of business establishments owned by the same parent company. This paper uses detailed Census data on hotels and restaurants to show how internal agglomeration influences performance. Interestingly, knowledge sharing between owned establishments in the same metropolitan area appears to be a key driver of the internal agglomeration effect.