This paper shows that matching frictions and a thick market externality in firm‐to‐firm trade shape the agglomeration of economic activity. Using panel data of firm‐to‐firm trade in Japan, I demonstrate that firms gradually match with alternative suppliers following an unanticipated supplier bankruptcy, and that the rate of rematching increases in the geographic density of alternative suppliers. Motivated by these empirical findings, I develop a general equilibrium model of firm‐to‐firm matching in input trade across space. The model reveals that the thick market externality gives rise to an agglomeration externality affecting regional production and welfare. Using the calibrated model to the reduced‐form patterns of firm‐to‐firm matching, I estimate that the elasticity of a region's real wage with respect to population density due to the thick market externality is approximately 0.02. This finding highlights the substantial impact of the thick market externality on the overall agglomeration benefit.

We show how to use commuting flows to infer the spatial distribution of income within a city. A simple workplace choice model predicts a gravity equation for commuting flows whose destination fixed effects correspond to wages. We implement this method with cell phone transaction data from Dhaka and Colombo. Model-predicted income predicts separate income data, at the workplace and residential level, and by skill group. Unlike machine learning approaches, our method does not require training data, yet it achieves comparable predictive power. We show that hartals (transportation strikes) in Dhaka reduce commuting more for high model-predicted wage and high skill commuters.

How do regional productivity shocks or transportation infrastructure improvements affect aggregate welfare? In a general class of spatial equilibrium models, we provide a formula for aggregate welfare changes, decomposed into terms associated with (i) technology [Fogel (1964), Railroads and American Economic Growth (Baltimore: Johns Hopkins Press), Hulten (1978) “Growth Accounting with Intermediate Inputs”, The Review of Economic Studies, 45, 511–518], (ii) spatial dispersion of marginal utility, (iii) fiscal externalities, (iv) technological externalities, and (v) redistribution. We further use this decomposition to derive a general formula for optimal spatial transfers and show that, whenever optimal transfers are in place, the technology term alone captures the aggregate welfare effects of technological shocks. We apply our framework to study welfare gains from improving the US highway network. We find that changes in the spatial dispersion of marginal utility are as important as technological externalities in accounting for the deviations from the Fogel-Hulten benchmark to assess welfare gains.

How do localized conflicts disrupt supply chains and prompt firms to reorganize them? How do these forces affect firm-level and aggregate economic activity? Using firm-to-firm Ukrainian railway-shipment data before and during the 2014 Russia–Ukraine conflict, we document that firms with prior supplier and buyer exposure to the conflict areas substantially decreased their output. Simultaneously, firms reorganized their production linkages away from partners directly or indirectly exposed to the conflict shock. We build a general-equilibrium production-network model with endogeneous link formation, and we show that our model’s sufficient statistics accurately explains the observed relative decline in firm output once we account for network reorganization. Calibrating our model to the Ukrainian economy, we find that the localized conflict decreased aggregate output in nonconflict areas by 5.5%. This effect increases to 8.4% if we abstract from endogeneous link formation, suggesting that production-network reorganization partially mitigates the detrimental, far-reaching aggregate economic costs of conflicts.

We develop a tractable quantitative framework for modeling the rich patterns of spatial mobility observed in smartphone data. We show that travel is frequently undertaken as part of a travel itinerary, defined as a journey starting and ending at home that can include more than one intermediate stop on a given day. We show that these travel itineraries provide microfoundations for consumption externalities and generate both complementarity and substitutability between locations. We show that the consumption externalities implied by travel itineraries are central to matching quasi-experimental evidence from the shift to working from home. We find that these consumption externalities are key drivers of the agglomeration of economic activity in central cities and shape the relative welfare gains from alternative transport improvements in favor of investments in central cities.