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We introduce knowledge spillovers as an externality in the production function of competitive firms operating in a finite spatial domain under adjustment costs. Spillovers are spatial as productive knowledge flows more easily among firms located nearby. When knowledge spillovers are not internalized by firms spatial agglomerations may emerge endogenously in a competitive equilibrium, however, they do not emerge at the steady state of the social optimum.
Brock, William; Xepapadeas, Anastasios; and Yannacopoulos, Athanasios, "Adjustment Costs and Long Run Spatial Agglomerations" (August 30, 2013). Fondazione Eni Enrico Mattei Working Papers. Paper 819.