Innovation driven sectoral shocks and aggregate city cycles

No 667, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research Department

Abstract: This paper formalizes one mechanism through which diversification in the production of research & development across firms located in a city dampens volatility in the local labor market, improves the incentives to perform research & development and smooths the aggregate business cycle fluctuations of a city. This is done by adapting the standard multi-sector quality ladder model (Grossman and Helpman 1991) in order to allow for heterogeneity across firms, thus taking into account knowledge spillovers across heterogenous sectors, knowledge accumulation, pecuniary externalities and segmented labor markets. As a result, according to the local degree of diversification in research & development, sectoral technological shocks have an influence on the current choice of research & development and the location of production, and in turn on local business cycles and the life cycle of the city: diversification in research & development allows innovations in different sectors of the city to arrive at different points in time, thus avoiding to put pressure on the local labor markets and keeping wage discipline. This permits firms located in the city to perform enough research & development and possibly beat outside competition in discovering and manufacturing new products, thus growing -at the aggregate city level-through less volatile cycles.

Keywords: quality ladder with heterogeneity across firms; labor pooling economies; knowledge spillovers; diversification; schumpeterian growth in the city (search for similar items in EconPapers)
JEL-codes: E32 O31 R23 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-geo, nep-knm, nep-mac, nep-tid and nep-ure
Date: Written 2008-04
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