Agglomeration economies and market size: Determinants of municipal GDP

Abstract

This article investigates the determinants of economic performance in Brazilian municipalities, with a focus on the impact of market size. Data from 4738 municipalities for the year 2021, along with spatial correlations and regressions, are used to assess how market size, agglomeration economies, and control variables such as natural resource abundance, workforce qualification, and infrastructure affect GDP. The local Moran’s I index reveals distinct spatial patterns: diversification in the Metropolitan Regions of São Paulo and Porto Alegre, in the Santa Catarina coast and Paraná, and in the Rio de Janeiro coastline, as well as primary specialization in the Midwest. Spatial regressions indicate that market size has a significant and positive influence on economic performance, however the proximity of municipalities with larger markets and more diversified production structures can negatively affect economic performance.