The uncertain city: Competitive instability, skills, innovation and the strategy of agglomeration

This paper considers the microfoundations of agglomeration economies, in particular agglomeration economies that arise from uncertainty. The paper begins with a simple model that captures several sorts of uncertainty-driven agglomeration. These include competitive instability, the need for skilled workers, and technological innovativeness. The model's key result is that firms facing more uncertainty will agglomerate with each other in large cities or industry clusters. Firms facing less uncertainty will be found in small cities or outside of clusters. The paper tests these ideas by employing survey data to see if establishments in large cities or industry clusters describe themselves as facing these sorts of uncertainty. The empirical results are consistent with the existence of all three of the agglomerative forces mentioned above. However, the forces operate in different ways. Competitive instability and technological innovativeness are associated with city size, while skill-orientation is associated with industry clustering.