Learning-by-doing and the development of industrial districts

Marshallian districts are locales that accommodate a large number of small firms producing similar goads to be exported and benefit from the accumulat ion of know-how associated with workers residing there. We study the making of such districts by assuming that the cost function of a firm is a decrea sing function of the total output produced in the past by the firms establi shed in the locale. The dynamics is described by a sequence of temporary eq uilibria in which firms equalize profits between locales at each period. He nce changing the spatial distribution of firms affects the production histo ry of each district. When new firms set up in a locale, they exacerbate com petition on the corresponding labor market, thus leading to a wage rise tha t reduces the incentives for firms to locate in the most efficient district . The short-run equilibrium distribution of firms is studied as well as the long-run properties of the adjustment process, (C) 1999 Academic Press.