Heterogeneous returns to knowledge exchange: Evidence from the urban wage premium

•The benefits of knowledge exchange vary across individuals.•In particular, agglomerative economies favor individuals who rely on creativity and informal networking.•Empirical evidence on the urban wage premium is consistent with the predictions of our model.

We posit that some kinds of knowledge are harder to exchange remotely and thus certain types of workers trading in certain types of knowledge benefit more from close physical proximity to others. We first present a theoretical framework in which individuals randomly search for partners to exchange ideas, but that the returns to finding a partner are heterogeneous. In particular, some knowledge is more dependent on interpersonal exchange and most productive when shared with similar individuals. In this manner, we propose that agglomerative environments favor individuals with knowledge that is typically associated with “soft skills” where creativity and informal networking are important. We test this prediction using the most recent sample of the American Community Survey (ACS) in which college graduates are asked about their undergraduate major. Controlling for demographic and regional productivity effects, we find that the urban wage premium varies considerably across majors. In line with the predictions of our model, people with non-STEM majors appear to benefit more from locating within a city. In the spirit of our results for majors, we also find that terminal degrees associated with the mastery of any existing cannon of knowledge such as a J.D. or M.D. experience a smaller urban wage premium.