Growth and Agglomeration

This article presents a model in which growth and geographic agglomeration of economic activities are mutually self‐reinforcing processes. Economic agglomeration in one region spurs growth because it reduces the cost of innovation in that region 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. Agglomeration implies that all innovation and most production activities take place in the core region. However, as new firms are continuously created in the core, some relocate their production to the periphery.