DP1523 | Growing Locations: Industry Location in a Model of Endogenous Growth

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This paper constructs a model of endogenous growth and endogenous industry location where the two interact. We show that with global spillovers in R&D, a high growth rate and a high level of transaction costs are associated with relocation of the newly created firms to the South (the location with a low initial human capital). With local spillovers in R&D, this activity will be agglomerated in the North and the rate of innovation will increase with the concentration of firms in the North. This in turn implies that a decrease of transaction costs through, for example, trade integration, will increase the growth rate because it leads to a higher industrial concentration of firms where the R&D is located. We show that industrial concentration improves welfare only for low enough transaction costs and high enough spillovers.