Knowledge Spillovers in Cities: An Auction Approach

Abstract: This paper proposes a micro-foundation for knowledge spillovers. I model a city in which free knowledge transfers are bids by experts to entrepreneurs who auction jobs. These knowledge bids resemble a consultant’s pitch to a potential client. Two fundamental properties of knowledge underlie the model: First, it is often necessary to reveal some knowledge to demonstrate its value. Second, knowledge is freely reproducible. Larger cities generatemore meetings between ex-perts and entrepreneurs, resulting in more learning and better matches. Larger cities also foster competition for jobs, which motivates experts to raise their knowledge bids. These results demonstrate how competitive behavior can be a source of agglomeration economies, and contribute to explain the higher productivity of urban workers. Key words: agglomeration, auction, knowledge spillovers. jel classification: d44, d83, r23, r39 ∗I thank Gilles Duranton and Matthew Turner for their advice and supervision, Ettore Damiano and Diego Puga fo