Economies of agglomeration are central in understanding the emergence of industrial clustering. However, existing models that incorporate economies of agglomeration to explain industrial concentration have been providing a quite small set of empirically testable predictions. In this paper, we propose a baseline model in which myopic firms make reversible locational choices in presence of dynamic increasing returns from agglomeration. Despite its simplicity, the model is able to deliver predictions about the long-run distribution of the size of spatial clusters. We test the predictions of the model against data on geographical distribution of Italian firms across industrial districts. We show that, at least in some benchmark industries, accordance of theoretical predictions with data is quite high. Finally, we explore the extents to which industrial sectors exhibit different economies of agglomeration. We find that geographical clustering is highly affected by intersectoral differences in industrial innovation patterns and learning regimes.
Location Dynamics Industrial Clustering Economies of Agglomeration Firm Locational Choice