Location Dynamics and Knowledge Agglomeration

A simple economic activity location rule is considered. Under this rule, one regards that location decisions depend on the presence or the absence of agglomeration economies. Considering a three-location economy, the system that is built leads, under certain conditions, to a saddle-path equilibrium, relatively to which we verify that the most interesting dynamics are associated not with the eventual convergence to the steady state (the saddle-path), that occurs only under exceptional circumstances, but with the divergence process away from the steady state. To explain the dynamics of the agglomeration economies, a knowledge variable is assumed. Returning to a two location economy one is able to assess in graphical terms the relation between distribution of knowledge and location of economic activities.