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ABSTRACT

Using an analytically solvable model, we study how the spatial distribution of economic activities and the ensuing welfare levels are affected by pecuniary externalities, depending on transportation costs, and localized technological externalities, due to the cost saving effect of intra- and interregional knowledge spillovers. Under the assumption of capital mobility and labor immobility, we show that increasing interregional knowledge spillovers, i.e., promoting technological openness, favors a smoother transition between different levels of firms concentration, makes trade globalization less likely to generate catastrophic and irreversible agglomeration, and ultimately leads to a less uneven distribution of welfare.