Estimating the drivers of urban economic complexity and their connection to economic performance

Abstract

Estimating the capabilities, or inputs of production, that drive and constrain the economic development of urban areas has remained a challenging goal. We posit that capabilities are instantiated in the complexity and sophistication of urban activities, the knowhow of individual workers, and the city-wide collective knowhow. We derive a model that indicates how the value of these three quantities can be inferred from the probability that an individual in a city is employed in a given urban activity. We illustrate how to estimate empirically these variables using data on employment across industries and metropolitan statistical areas in the US. We then show how the functional form of the probability function derived from our theory is statistically superior when compared to competing alternative models, and that it explains well-known results in the urban scaling and economic complexity literature. Finally, we show how the quantities are associated with metrics of economic performance, suggesting our theory can provide testable implications for why some cities are more prosperous than others.