This chapter examines empirical strategies that have been or could be used to evaluate the importance of agglomeration and trade models. This theoretical approach, widely known as “New Economic Geography” (NEG), emphasizes the interaction between transport costs and firm-level scale economies as a source of agglomeration. NEG focuses on forward and backward trade linkages as causes of observed spatial concentration of economic activity. We survey the existing literature, organizing the papers we discuss under the rubric of five interesting and testable hypotheses that emerge from NEG theory. We conclude the chapter with an overall assessment of the empirical support for NEG and suggest some directions for future research.

This paper develops micro-foundations for the role that diversified cities play in fostering innovation. A simple model of process innovation is proposed, where firms learn about their ideal production process by making prototypes. We build around this a dynamic general equilibrium model, and derive conditions under which diversified and specialised cities coexist in steady-state. New products are developed in diversified cities, trying processes borrowed from different activities. On finding their ideal process, firms switch to mass-production and relocate to specialised cities where production costs are lower. We find strong evidence of this pattern in establishment relocations across French employment areas 1993–1996.

We use a novel dataset and research design to empirically detect the effect of social interactions among neighbors on labor market outcomes. Specifically, using Census data that characterize residential and employment locations down to the city block, we examine whether individuals residing in the same block are more likely to work together than individuals in nearby but not identical blocks. We find significant evidence of social interactions; the baseline probability of working together is 0.93 % at the block level compared to 0.51 % at the block group level (a collection of ten contiguous blocks). We also provide evidence as to which types of matches between individuals result in greater levels of referrals. These findings are robust to the introduction of detailed controls for socio-demographic characteristics and block group fixed effects, as well as across various specifications intended to address sorting and housing market rather than labor market referrals. Further, our estimated effects have a significant impact on a wide range of labor market outcomes more generally.

This paper considers the argument of Marshall that concentration of industry at a single location allows for a ner division of labor in the industry than would be possible if the industry were di used over a wide area. I use Census data on manufacturing plants to examine the relationship between localization of industry and vertical disintegration. I nd that establishments located near other establishments within the same industry tend to make more intensive use of purchased inputs than establishments without own-industry neighbors. This relationship only holds among industries that are geographically concentrated; having neighbors makes no di erence in geographically dispersed industries. I argue that this pattern is consistent with a model in which increased opportunity for specialization is the reason some industries localize. The views expressed herein are those of the author and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System. I am grateful to Pete Klenow, Jim Schmitz, and seminar participants at the Federal Reserve Bank of Minneapolis and New York

the company level has been dominated by what goes on inside companies. Thinking about the competitiveness of nations and states has focused on the economy as a whole, with national economic policy seen as the dominant influence. In both competition and competitiveness the role of location is all but absent. If anything, the tendency has been to see location as diminishing in importance. 1 Globalization allows companies to source capital, goods, and technology from anywhere and to locate operations wherever it is most cost effective. Governments are widely seen as losing their influence over competition to global forces. This perspective, although widespread, does not accord with competitive reality. In The Competitive

A number of potential advantages of industry agglomeration—or spatial clustering—have since long been identified in the research literature, notably related to shared costs for infrastructure, the build up of a skilled labour force, transaction efficiency, and knowledge spill-overs leading to firm learning and innovation. We identify two shortcomings of existing research on the clustering phenomenon. First, the abundance of theoretical concepts stands in sharp contrast with the general lack of work aiming to validate these mechanisms empirically and the contradictory evidence found in recent empirical work in the field. Secondly, there is a lack of a unified theoretical framework for analyzing spatial clustering. In an attempt to remedy the second shortcoming, this paper investigates the nature of the cluster from a knowledge creation or learning perspective. We argue for the need to establish a specific theory of the cluster where learning occupies center stage. The basic requirements for such a theory of the cluster are discussed. Two main components of such a theory are identified: it must explain the existence of the cluster on the one hand and its internal organization on the other.

paper was conducted while the authors were Special Sworn Status researchers of the U.S. Census Bureau at the Boston Census Research Data Center (BRDC). Support for this research from NSF grant (ITR-0427889) is gratefully acknowledged. Research results and conclusions expressed are our own and do not necessarily reflect the views of the Census Bureau or NSF. This paper has been Many industries are geographically concentrated. Many mechanisms that could account for such agglomeration have been proposed. We note that these theories make different predictions about which pairs of industries should be coagglomerated. We discuss the measurement of coagglomeration and use data from the Census Bureau’s Longitudinal Research Database from 1972 to 1997 to compute pairwise coagglomeration measurements for U.S. manufacturing industries. Industry attributes are used to construct measures of the relevance of each of Marshall’s three theories of industry agglomeration to each industry pair: (1) agglomeration saves transport costs by proximity to input suppliers or final consumers, (2) agglomeration allows for labor market pooling, and (3) agglomeration facilitates intellectual spillovers. We assess the importance of the theories via regressions

assistance. The authors also gratefully acknowledge support provided by the Council on Competitiveness. Stern

Striking evidence is presented of a previously unremarked transformation of urban structure from mainly sectoral to mainly functional specialisation. We offer an explanation showing that this transformation is inextricably interrelated with changes in firms ’ organisation. A greater variety of business services for headquarters and of sector-specific intermediates for production plants within a city reduces costs, while congestion increases with city size. A fall in the costs of remote management leads to a transformation of the equilibrium urban and industrial structure. Cities shift from specialising by sector — with integrated headquarters and plants — to specialising mainly by function — with headquarters and business services clustered in larger cities, and plants clustered in smaller cities.

their support. This paper would not have been possible without the help of a great many people. I am very grateful for the efforts that a number of journals made to supply me with data. In addition, many of the ideas in this paper were developed in the course of a series of conversations with other economists. I would especially like to thank Orley Ashenfelter, Susan Athey, Robert Barro, Gary