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Digitized by the Internet Archive in 2011 with funding from Boston Library Consortium IVIember Libraries http://www.archive.org/details/identifyingagglo00gree2 ^$>3i DEWEY ll c7>'3i Massachusetts Institute of Technology Department of Econonnics Working Paper Series IDENTIFYING AGGLOMERATION SPILLOVERS: EVIDENCE FROM MILLION DOLLAR PLANTS Michael Greenstone Richard Hornbeck Enrico Moretti Working Paper 07-31 December 2007 19, Room E52-251 50 Memorial Drive MA Cambridge, 021 42 Thispaper canbe downloaded without charge fromthe Social Science ResearchNetwork Paper Collection at http://ssrn.com/abstract=1078027 ;1 5 Identifying Agglomeration Spillovers: Evidence from Million Dollar Plants* Michael Greenstone Richard Hombeck Enrico Moretti December 2007 *We thank Daron Acemoglu, Jim Davis, Vemon Henderson, William Kerr, Jeffrey KLling, Jonathan Levin, Stuart Rosenthal, Christopher Rohlfs, Chad Syverson, and seminar participants at Berkeley, the Brookings Institution, MIT, NBER Summer Institute, San Francisco Federal Reserve, Stanford, and Syracuse for insightful comments. Elizabeth Greenwood provided valuable research assistance. The research in this paper was conducted while the authors were Special Sworn Status researchers of the U.S. Census Bureau at the Boston Census Research Data Center (BRDC). Support ofthe Census Research Data Center network from NSF grant no. 0427889 is gratefully acknowledged. Research results and conclusions expressed arethose ofthe authors and do not necessarilyreflect the views oftheCensus Bureau. Thispaperhasbeenscreened to insure thatno confidentialdataarerevealed. Abstract 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 ofincumbent plants in winning counties in the absence ofthe plant opening. Incumbentplants in winning and losing counties have economically and statistically similar trends in TFP in the 7 years before the opening, which supports the vahdity ofthe identifying assumption. Afterthe new plantopening, incumbent plants in winning counties experience a sharp relative increase in TFP. Five years after the opening, TFP ofincumbent 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. Michael Greenstone MIT Department ofEconomics 50 Memorial Drive, E52-359 MA Cambridge, 02142-1347 and NBER [email protected] RichardHombeck MIT Department ofEconomics E52-391 77 Massachusetts Avenue MA Cambridge 02142-1347 hombeck(a)mit.edu Enrico Moretti University ofCalifornia, Berkeley Department ofEconomics Berkeley, CA 94720-3880 and NBER [email protected]