Staff Report 219

How Industries Migrate When Agglomeration Economies Are Important

Thomas J. Holmes | University of Minnesota, Federal Reserve Bank of Minneapolis

Published October 1, 1996

The Economics of QWERTY suggests that historical accidents can trap economies in inefficient equilibria. This paper suggests that such accidents do not have the force that proponents claim. The paper presents a mechanism that may unravel a locational advantage caused by an historical accident. In the model, there are agglomeration benefits from concentrating industry in a particular location because it enables a large variety of local suppliers to emerge. Firms differ by the extent to which they purchase from local suppliers. Low-tier firms purchase little; high-tier firms purchase more. When the industry migrates, the lowest-tier products move first.

Published In: Journal of Urban Economics (Vol. 45, No. 2, March 1999, pp. 240-263)

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