California Dreaming: The Exaggerated Promise of Agglomeration Economies

Luis Cabral
Paganelli-Bull Professor of Economics and International Business; 
Chair, Department of Economics
New York University 

Much of European industrial cluster policy is based on the idea of agglomeration economies. The same can be said about industrial policy in many developing countries. My research and that of other authors suggests that reliance on the "virtuous dynamics" of agglomeration economies may be misleading—and ultimately lead to significant economic losses. 

This presentation will focus on an important historical case: the development of the US automobile industry during the first decades of the 20th century. I suggest that the rise of Detroit is less due to the oft-trumpeted "snow-ball" effect of agglomeration economies than to particular local conditions, namely input availability. I will also discuss comparisons to other countries, as well as implications for economic development policy.