Working Paper: NBER ID: w10106
Authors: Andres Almazan; Adolfo De Motta; Sheridan Titman
Abstract: This paper presents a theory of location choice that draws on insights from the incomplete contracts and investment flexibility (real option) literatures. We provide conditions under which human capital is more efficiently created and better utilized within industrial clusters that contain similar firms. Our analysis indicates that location choices are influenced by the extent to which training costs are borne by firms versus employees as well as by the uncertainty about future productivity shocks and the ability of firms to modify the scale of their operations. Extensions of our model consider, among other things, endogenous technological choices by firms in clusters and how behavioral biases (i.e., managerial overconfidence about their firms' prospects) can affect firms' location choices.
Keywords: human capital; firm location; industrial clusters; knowledge-based industries
JEL Codes: R3; L2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Industrial clustering (L69) | efficiency of human capital creation and utilization (J24) |
| Industrial clustering (L69) | competitive labor market (J29) |
| competitive labor market (J29) | efficient utilization of human capital (J24) |
| Training costs (M53) | firms' location decisions (R30) |
| Location (R32) | training investment (M53) |
| Future productivity shocks (O49) | firms' decisions to cluster or isolate (R32) |
| Uncertainty (D89) | clustering incentives (C38) |