Matching and learning in cities

"This paper examines the role of knowledge spillovers on innovations in metropolitan areas. We use patents per capita (patent intensity) in a metropolitan area as a measure of innovation. We find that, after controlling for other factors, patent intensity is positively related to the number of jobs per square mile (employment density) of metropolitan areas. All else equal, patent intensity is about 20 percent higher in a metropolitan area with an employment density twice that of another metropolitan area. Absent congestion effects, since local employment density doubles nearly four times across our sample, the implied gains in patents per capita due to urban density are substantial. Accounting for congestion, we find that a metropolitan area with an employment density of 2,150 jobs per square mile—about the densities of Baltimore (2,168) and Philadelphia (2,181)—optimizes patent intensity. We also find that patent intensity is higher in cities that have a more competitive market structure and that are not too large (e.g., a population of less than 1 million). These findings confirm the widely held view that the nation's densest locations play an important role in creating the flow of ideas that generates innovation and growth"--Federal Reserve Bank of Philadelphia web site.