Productivity and earnings at Firms’ Local Unit Level: the case of Lombardy urban and non-urban agglomerations

We analyse business performance by using a unique dataset of the universe of Italian local business units. We investigate the pattern of both productivity and profitability by adopting a decomposition technique to document spatial variation across urban and non-urban areas. Aggregate evidence indicates that an urban – non-urban productivity divide exists, but this premium vanishes with respect to profitability. Plant-level estimations using a Hierarchical Linear Model show that area attractiveness positively affects productivity, whereas diseconomies of agglomeration negatively affect profitability. Coping with agglomeration costs is a priority for the regional policy if the productivity gains in urban areas could be transferred into new investment and growth opportunities.