Friday, December 01, 2006

Virtual proximity

The economic and social importance of proximity are well known. After all, why are there cities? We also know that the marginal costs of communications are lower than ever -- and falling. Nevertheless, people continue to pay handsomely for Manhattan-type nearness while many seek Silicon Valley-type nearness, which spans several counties.

A new empirical study by E. Han Kim, Adair Morse and Luigi Zingales ("Are Elite Universities Losing Their Competitive Edge"?, NBER WP 12245) reports that the importance of physical proximity is diminishing.

"We study the location-specific component of research productivity of economics and finance faculty who have ever affiliated with the top 25 universities in the past decade. We find that there was a positive effect to being affliated with an elite university in the 1970s; this effect weakened in the 1980s and disappeared in the 1990s. We decompose this university fixed effect and find that its decline is due to the reduce importance of physical access to productive research colleagues."

Virtual proximity, all things considered, wins.