Working Paper: CEPR ID: DP1529
Authors: Philippe Martin; Gianmarco I.P. Ottaviano
Abstract: This paper presents a model in which growth and geographic agglomeration of economic activities are mutually self reinforcing processes. Industrial agglomeration in one location spurs growth because it reduces the cost of innovation in that location through a pecuniary externality due to transaction costs. Growth fosters agglomeration because as the sector at the origin of innovation expands, new firms tend to locate close to this sector. The model can be interpreted as illustrating one mechanism behind the emergence of cities seen as centres for production and innovation, and is consistent with the episodes of simultaneous increases in growth rates and spatial agglomeration.
Keywords: endogenous growth; agglomeration; technological progress; cities
JEL Codes: R11; R12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Growth in the innovation sector (O35) | Agglomeration of economic activities (R11) |
| Increased agglomeration (R11) | Reduced cost of innovation (O36) |
| Reduced cost of innovation (O36) | Further growth (O00) |
| Growth (O00) | Agglomeration (R11) |
| Agglomeration (R11) | Growth (O00) |
| Lower transaction costs (D23) | Increased rate of innovation (O39) |