Growth and agglomeration

This article presents a model in which growth and geographic agglomeration of economic activities are mutually self-reinforcing processes. Economic ag glomeration in one region spurs growth because it reduces the cost of innov ation in that region through a pecuniary externality due to transaction cos ts. Growth fosters agglomeration because, as the sector at the origin of in novation expands, new firms tend to locate close to this sector. Agglomerat ion implies that all innovation and most production activities take place i n the core region. However, as new firms are continuously created in the co re, some relocate their production to the periphery.