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.

Why are some cities specialised and others diversified? What are the advantages and disadvantages of urban specialisation and diversity? To what extent does the structure of cities, and the activities of firms and people in them, change over time? How does the sectoral composition of cities influence their evolution? To answer these and related questions, we first distil some key stylised facts from the empirical literature on cities and the composition of their activities. We then turn to a review of different theories looking at such issues, and study the extent to which these theories contribute to the understanding of the empirical regularities.

agglomeration from firm selection

In this paper we investigate the relationship between location patterns, innovation processes and industrial clusters. In order to do this we extend a transactions costsbased classification of industrial clusters into a knowledge-based taxonomy of clusters, along the lines suggested by a critical revision of the main assumptions underlying most of the existing literature on spatially defined clusters. Our arguments show that the transactions costs approach and the innovation and technological change framework are broadly consistent, and that real insights into the microfoundations, nature, and evolution of clusters can be provided by these classification systems.

This paper presents a micro-model of knowledge creation through the interactions among a group of people. Our model incorporates two key aspects of the cooperative process of knowledge creation: (i) heterogeneity of people in their state of knowledge is essential for successful cooperation in the joint creation of new ideas, while (ii) the very process of cooperative knowledge creation affects the heterogeneity of people through the accumulation of knowledge in common. The model features myopic agents in a pure externality model of interaction. Surprisingly, in the general case for a large set of initial conditions we find that the equilibrium process of knowledge creation converges to the most productive state, where the population splits into smaller groups of optimal size; close interaction takes place within each group only. This optimal size is larger as the heterogeneity of knowledge is more important in the knowledge production process. Equilibrium paths are found analytically, and they are a discontinuous function of initial heterogeneity. JEL

Abstract: Firms and workers are much more productive in large and dense urban environments. There is substantial evidence of such agglomeration economies based on three aproaches. First, on a clustering of production beyond what can be explained by chance or comparative advantage. Second, on spatial patterns in wages and rents. Third, on systematic variations in productivity with the urban environment. However, more needs to be learned about the causes of agglomeration economies. We have good models of agglomeration through sharing and matching, but not a deep enough understanding of learning in cities. Despite recent progress, more work is needed to distinguish empirically between alternative causes. Key words: agglomeration economies. jel classification: r30 This paper has been written for the Journal of Regional Science’s 50 th

Following Ellison and Glaeser (1997), we develop a framework to test for the link between concentration, spatial clustering and the size of plants. Concentration is an a-spatial concept of variability that can be measured with the Ellison and Glaeser (EG) index. By contrast, spatial clustering being directly concerned with distances, a two-dimensional measure such as the Moran index allows to identify specific agglomeration patterns. We argue that, if the size of plants were independent on both concentration and agglomeration, as in the standard monopolistic competition framework, all the variability in those indexes should be accounted for by the variation in the number of plants. Using the Italian 1996 census year data, we compare the values and significance of both the EG and Moran indexes computed on an employment and a number of plants basis. Our results indicate that, for the majority of Italian manufacturing industries, big plants have larger concentration incentives than small ones, even once controlled for size effects, and that concentration and size simultaneously influence each other. By contrast, small plants exhibit stronger positive auto-correlation, whose scope might extend to large spatial scales, size and clustering being also endogenous. Different externalities might thus drive concentration and

The incremental innovations that underly much of modern economic growth typically involve changes to one or more components of a complex product. This creates a tension. On the one hand, a principal would like an agent to contribute innovative components. On the other hand, ironing out incompatibilities between interdependent components can be a drain on the principal's energies. The principal can conserve her energies by tightly controlling the innovation process, but this may inadvertently stifle the agent's incentive to innovate. We show precisely how this tension between creating knowledge and controlling knowledge shapes organizational forms. The novel concepts introduced are illustrated with case studies of the flat panel cathode ray tube industry and Boeing's recent location decisions.

We develop a diagrammatic framework that can be used to study the economic linkages between regions or cities. Hitherto, such linkages have not been the primary focus of either the theoretical or empirical literatures. We show that our general framework can be used to interpret both the New Economic Geography and Urban Systems literatures to help us understand spatial economic linkages. We then extend the theoretical framework to allow us to consider a number of additional issues which may be particularly important for analyzing the impact of policy. Such policy analysis will also require empirical work to identify the nature of key relationships. In a final section, we consider what the existing empirical literature can tell us about these relationships.

The size distribution of cities in many countries follows some broadly regular patterns. Any good theory of city size distributions should (i) be able to account for this regularity, but also (ii) rely on a plausible economic mechanism and (iii) be consistent with other fundamental features of cities like the existence of agglomeration economies and crowding costs. Unlike the previous literature, the model proposed here satisfies these three requirements. It views small innovation-driven technological shocks as the main engine behind the growth and decline of cities. Cities grow or decline as they win or lose industries following new innovations. Formally, this is achieved by embedding the quality-ladder model of growth developed by Grossman and Helpman in an urban framework. Key words: City size distribution, quality-ladder models of growth, agglomeration economies. JEL classification: O18, R11, R12.