Localized technological externalities and the geographical distribution of firms

Using an analytically solvable general equilibrium model, we study how the distribution of economic activities is affected by the trade-off between pecuniary externalities, as dependent on transportation costs, and localized technological externalities, as dependent on inter-regional spillovers. We model localized technological externalities as having a cost saving effect that can be interpreted as a technological advantage, like the presence of interfirms knowledge spillovers. Under the assumption of capital mobility and labour immobility, we show that whereas decreasing transportation costs, i.e. promoting market openness, leads to sudden agglomeration, increasing inter-regional spillovers, i.e. promoting technological openness, favors a smoother transition between different levels of firms concentration and ultimately leads to a less uneven distribution of welfare.