Density and Allocative Efficiency in Turkish Manufacturing

Using administrative data covering the economic geography of Turkish manufacturing firms I show that density increases a location’s productivity through both typical firm productivity and stronger association of firm size and productivity—a measure of within-sector allocative efficiency. IV estimates suggest a density elasticity of allocative efficiency that accounts for about one third of the overall impact of density on productivity. A model with decreasing returns to scale and convex cost of avoidance from the burden of regulations can explain the estimated density-allocative efficiency relationship on the grounds that denser locations provide lower degree of internal diseconomies.