Where do firms locate? Testing competing models of agglomeration

Firms' location decisions often drive economic models of agglomeration, so distinguishing the causes of agglomeration requires understanding those decisions. Firms value proximity to (1) customers in market access models, (2) other firms as sources of positive externalities in production externality models, and (3) specialized inputs in natural advantage models. Special cases of production externalities are localization and urbanization externalities. Each model predicts different relationships between land rents in regions where an industry operates, that industry's productivity, that industry's share of regional employment, and how diverse is the regional workforce across industries. I use these predictions to empirically determine which model best explains the location decisions of firms in different US manufacturing industries. (c) 2005 Elsevier Inc. All rights reserved.