Nursery Cities: Urban Diversity, Process Innovation and the Life-Cycle of Products

TLDR: In this paper, a simple model of process innovation is proposed, where firms learn about their ideal production process by making prototypes and switch to mass-production and relocate to specialised cities with lower costs.

Abstract: A simple model of process innovation is proposed, where firms learn about their ideal production process by making prototypes. We build around this a dynamic general equilibrium model, and derive conditions under which diversified and specialised cities coexist. New products are developed in diversified cities, trying processes borrowed from different activities. On finding their ideal process, firms switch to mass-production and relocate to specialised cities with lower costs. When in equilibrium, this configuration welfare-dominates those with only diversified or only specialised cities. We find strong evidence of this relocation pattern in establishment relocations across French employment areas 1993u1996.