Economic Development and Public Finance Working Paper Series

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This paper investigates the importance of industrial diversity in determining the nature of agglomeration economies, using an indirect test which measures the effects of export industry demand shocks on center city and suburban employment growth. Testing for the importance of diversity is accomplished by constructing a measure of export price shocks to central cities and their suburbs, called the Export Price Index. The results reveal that urbanization economies do exist, but that their relative importance varies with the diversity of local industrial structure and hence that it varies across cities. This explains why the current literature contains strong empirical support for the importance of both urbanization and localization economies.