According to the economic geography literature, firms tend to geographically cluster when agglomeration economies exist. These are positive externalities associated with the co-location of firms within a bounded geographic area. Traditionally, the agglomerative advantages have been expressed in terms of pecuniary externalities and they have been identified as one of the key sources of the geographical clusters' competitive advantage. However, in the last years the basics of competition are changed and the ability of firms to create new knowledge is more crucial for success rather than the efficiency in production. This has shifted the attention of scholars on the role of knowledge and learning for the competitiveness and success of geographical clusters. In line with these studies, the chapter suggests that agglomeration economies are related to both pecuniary externalities and knowledge-based externalities. The latter are benefits that co-located firms can gain in terms of development of knowledge. To investigate whether knowledge-based externalities affect geographical clustering of firms, an agent-based model is developed. By using this model, a simulation analysis is carried out.
Pecuniary Externalities, Bank Overleverage, and Macroeconomic Fragility