Working Paper: CEPR ID: DP1344
Authors: Masahisa Fujita; Jacques-François Thisse
Abstract: We address the fundamental question arising in economic geography: why do economic activities agglomerate in a small number of places? The main reasons for the formation of economic clusters involving firms and/or households are analysed: (i) externalities under perfect competition; (ii) increasing returns under monopolistic competition; and (iii) spatial competition under strategic interaction. We review what has been accomplished in these three domains and identify a few general principles governing the organization of economic space. Other standard lines of research in location theory are also discussed while several alternative, new approaches are proposed.
Keywords: agglomeration; city; externality; imperfect competition; trade
JEL Codes: F12; L13; R12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| externalities on the production side (D62) | clustering of firms (R32) |
| increasing returns to scale in monopolistic competition (D42) | clustering of firms (R32) |
| spatial competition (R32) | clustering of firms (R32) |
| proximity of firms (R32) | enhanced communication (L96) |
| enhanced communication (L96) | greater productivity (O49) |
| initial agglomeration (R32) | attracts more firms and workers (J69) |
| technological and pecuniary externalities (O36) | agglomeration process (R32) |