No. 4/2025: Intangible capital and agglomeration economies

Abstract

Intangible capital, an asset class central to the knowledge economy, has been shown to contribute substantially to productivity growth. However, the importance for agglomeration economies has received limited attention. We examine how the agglomeration effect varies with industries’ intensity of intangible capital, combining international measures of industry-level intangible capital with rich Norwegian administrative employer–employee data. The analysis addresses methodological challenges related to endogenous intangible investment, unobserved worker characteristics, and correlation between worker moves and firm quality. We find that at mean intangible intensity, the elasticity of wages with respect to city size is 0.026, with each standard-deviation increase in intangible intensity raising the elasticity by 0.004. Dynamic wage returns to city-specific experience are also significantly higher in intangible-intensive industries. Employing the AKM framework and a complementary firm- based measure of local productivity, we show that our main results are robust to potential hierarchy effects arising from worker mobility. Moreover, we document that positive selection on unobserved ability into large cities is driven primarily by workers employed in intangible-intensive industries, irrespective of education level. We further document heterogeneity across intangible components, showing that agglomeration elasticities are strong for industries intensive in software and databases, and economic competencies. Taken together, these findings highlight the importance of intangible capital investments in shaping urban wage premia.