Abstract:
In this paper, I empirically investigate the effect of economic agglomeration on resource misallocation. Using data on the universe of manufacturing firms in Turkey between 2005 and 2015 and firm specific exchange rates as exogenous supply/demand shifters, I show that (i) industry level allocative efficiency is higher in agglomerated areas, (ii) firm-level distortions are lower in denser areas, (iii) thick labor markets mitigate the response of firm-level distortions to short-run fluctuations.
