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Urban Producer Theory Open Access

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Urban producer theory introduces a production function which incorporates congestion in production with inputs possessing a quality component that influences productivity. These features yield cost-minimizing behavior in which firms respond to higher space rent by increasing the quality of the inputs used in production. This behavior generates demand-side sorting of high quality inputs into high rent areas. The prediction of sorting based on input quality is tested on attorneys employed in the Cleveland CBSA. Evidence of the sorting into high rent areas of attorneys based upon the national ranking of the law school attended is found. A 1% increase in rent leads to a 1.26% to 2.89% increase in the number of the highest quality attorneys employed in high rent districts. Ability sorting poses a significant risk in biasing the measurement of agglomeration economies based on wages.

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