How Local are Spatial Density Externalities? evidence from square grid data

We analyze the geographic scale at which density externalities operate and their attenuation with distance. Using square grid data at a fine spatial resolution, we find that a doubling of neighborhood density, measured as the density of 1 km2 squares, yields an increase in the overall wage-level of a square in the order of 3 percent. The density of the wider region to which the neighborhood belongs shows a significantly smaller effect. Highly educated workers gain more from proximity to others, and when we decrease the sizes of the squares the effect is still stronger for such workers. Density effects operate simultaneously at different spatial levels, and we argue that the neighborhood effects are more prone to capture localized non-market effects, such as knowledge spillovers driven by face-to-face interaction.