Knowledge Exchange, Matching, and Agglomeration

Despite wide recognition of their significant role in explaining sustained growth and economic development, uncompensated knowledge spillovers have not yet been fully modeled with a microeconomic foundation. The main purpose of this paper is to illustrate the exchange of knowledge as well as its consequences on agglomerative activity in a general-equilibrium search-theoretic framework. Agents, possessing differentiated types of knowledge, search for partners to exchange ideas and create new knowledge in order to improve production efficacy. When individuals’ types of knowledge are too diverse, a match is less likely to generate significant innovations. We demonstrate that the extent of agglomeration has significant implications for the patterns of information flows in economies. Further, by simultaneously determining the patterns of knowledge exchange and the spatial agglomeration of an economy we identify additional channels for interaction between agglomerative activity and knowledge exchange. Finally, contrary to previous work in spatial agglomeration, our model suggests that agglomerative environments may be either under-specialized and under-populated or over-specialized and over-populated relative to the social optimum. JEL Classifications: C78; D51; R12 Acknowledgments: We thank Beth Allen, Kalyan Chatterjee, Ed Coulson, Robert Helsley, Bill Hoyt, Pat Kehoe, Derek Laing, Victor Li, Chris Phelan, Will Strange, and participants at the Midwest Mathematical Economics Conference at Northwestern University, the Regional Science Association International Meetings in Buffalo, the Society for Economic Dynamics Conference in Philadelphia and seminar participants at Academia Sinica, Carnegie-Mellon University, the Federal Reserve Bank of Minneapolis, Penn State University, the University of Kansas, the University of Kentucky, and Washington University in St. Louis for valuable comments and suggestions. The first author acknowledges financial support from the NSF grant No. SBR-9523940. Needless to say, the usual disclaimer applies. Correspondence: Marcus Berliant, Department of Economics, Washington University in St. Louis, Campus Box 1208, 1 Brookings Drive, St. Louis, MO 63130, U.S.A.; email: berliant@wueconc.wustl.edu.

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