DP1529 Growth and Agglomeration

Author(s): Philippe Martin, Gianmarco Ottaviano
Publication Date: November 1996
Keyword(s): Agglomeration, Cities, Endogenous Growth, Technological Progress
JEL(s): 041, O31, R11, R12
Programme Areas: International Macroeconomics, International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=1529

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.