Thus, our model predicts that population growth reduces establishment sizes
in both regions following simple composition effects. The data, however, show
that changes in establishment size are negative in both regions for slightly more
than half of the cities in our sample. What factors may explain the behavior of
establishment size in the remaining cities? Given the theory we have just laid
out, a possible answer is that lower communication costs have led to larger spans
of control (an increase in α) and, therefore, larger firms throughout the city. The
evidence suggests that this phenomenon did not dominate changes in average firm
size in most cities in the 1980s, but may nevertheless be significant in more recent
time periods for several cities (as argued by Garicano and Rossi-Hansberg, 2006,
for the late 1990s).