The Emergence of Coagglomeration

This article uses an agent-based model of intercity firm location to explore the industrial composition of cities. Starting from a random allocation of firms across cities, firms relocate in pursuit of greater profit. There are several key results. First, there is a positive and nonlinear relationship between the strength of inter-industry external economies and coagglomeration, a result that supports using coagglomeration to study the microfoundations of agglomeration economies and to determine the boundaries of industry clusters. Second, the equilibrium level of coagglomeration is less than the efficient level. Third, history matters in the sense that a legacy of homogeneous or heterogeneous cities tilts the economy in favor of the historical pattern. Fourth, an increase in firm size increases coagglomeration. Fifth, an increase in relocation cost increases coagglomeration.