Theoretical perspectives on localised knowledge spillovers and agglomeration

Empirical evidence shows that innovation is geographically concentrated, but whether localised knowledge spillovers provide a logically valid explanation for this phenomenon is unclear. I show that in the context of cost-reducing R&D spillovers between Cournot oligopolists the explanation is plausible: localised knowledge spillovers encourage agglomeration, but whether this leads to higher levels of effective R&D depends on the extent of the spillovers, the number of farms, and the industry's R&D effciency. Contrary to the earlier theoretical work,this illustrates a context, in which the localised knowledge spillover explanation is actualised, and provides necessary conditions, which can be empirically tested