Agglomeration and the extent of the market: Theory and experiment on spatially coordinated exchange

Cities and marketplaces are central to economic development, but we know little about the mechanisms that cause such agglomerations to form. I theorize that evolutionary forces select for agglomerations when individuals desire to spatially coordinate exchange in complex environments. To test this idea, I perform a laboratory experiment where geographically dispersed individuals bring different goods to a location for trade. Consistent with the theory, I find that individuals spontaneously coalesce to reap the gains from exchange and there is more agglomeration in economies with a larger variety of goods. I also find that agglomerations re-emerge at the same locations after shocks, being land-tied reduces agglomeration but magnifies the effect of variety, individual location choices aggregate to create a Zipf population distribution, and individuals earn more in agglomerations.