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JournalofUrbanEconomics45,240–263(1999)ArticleIDjuec.1998.2096,availableonlineatficientequilibria.Thispapersuggeststhatsuchaccidentsdonothavetheforcethatproponentsclaim.Thepaperpresentsamechanismthatmayunravelalocationaladvantagecausedbyanhistoricalaccident.Inthemodel,thereareagglomerationbenefitsfromconcentratingindustryinaparticularlocationbecauseitenablesalargevarietyoflocalsupplierstoemerge.Firmsdifferbytheextenttowhichtheypurchasefromlocalsuppliers.Low-tierfirmspurchaselittle;high-tierfirmspurchasemore.Whentheindustrymigrates,thelowest-tierproductsmovefirst.©1999AcademicPress1.INTRODUCTIONThepossibilityofmultipleequilibriaunderincreasingreturnshasre-ceivedmuchattentionrecently.WorkbyArthur[2],Krugman[13],FarrellandSaloner[8],andDavid[5]emphasizesthatinsuchsituationsequilib-riumoutcomesmaybedeterminedbyaccidentsofhistory.Forexample,Krugman[13]discussesseveralsourcesofincreasingreturnsfromconcen-tratingtheproductionofaparticularindustryinaparticularlocation.Withtheseagglomerationeconomies,theremaybemultipleequilibriathatdifferaccordingtowheretheindustryconcentrates.KrugmantracesthecurrentconcentrationofthecarpetindustryinDalton,Georgia,toanhistoricalaccidentin1895inwhichateenagedgirlnamedCatherineEvansmadeatuftedbedspreadforagift.Totakeanotherexample,David[5]arguesthattherearenetworkexternalitiestothewidespreadadoptionofastan-dardkeyboard.DavidattributestheemergenceoftheQWERTYkeyboardstandardtoanhistoricalaccident.Arecurringthemeofthisliteratureisthattheequilibriumselectedbythehistoricalaccidentmayturnouttobeaninefficientequilibrium.Forexample,inthecaseoftheQWERTYkeyboard,itisarguedthatthereexistsanalternativekeyboardwithasuperiorlayoutofthekeys.However,2400094-1190/99$30.00Copyright©1999byAcademicPressAllrightsofreproductioninanyformreserved.howindustriesmigrate241accordingtotheargument,peoplecontinuetousetheQWERTYkeyboardbecauseeveryoneelseusesit.1Canhistoricalaccidentshavesuchforce?IfforsomereasonSaltLakeCitybecomesamorenaturalplacetoproducecarpetsthanDalton,Geor-gia,isitpossiblethattheindustrywillremaininGeorgiabecauseofabedspreadmade100yearsago?Thispapersuggeststhathistoricalacci-dentsmayhavelessforcethanthepreviousliteraturesuggests.Thispaperdevelopsatheoryofhoweconomicagentsinitiallysituatedinaninferiorlocationorstandardmightmigratetothesuperiorlocationorstandard.Thedeparturefromthepreviousliteratureistoconsideramodelwhereeconomicagentsdifferintheweighttheyplaceonbeingnearotheragents.Someagentsvalueagglomerationbenefitsagreatdeal;othersvaluethemlittle.Inthemodel,thereareagglomerationbenefitsthatarisefromconcen-tratingindustryinaparticularlocationbecauseconcentrationenablesalargevarietyoflocalspecializedsupplierstoemergeatthelocation.Themodelfollowstherecentliterature(e.g.,Abdel-Rahman[1],Krugman[14])andusestheSpence[21]andDixitandStiglitz[6]modelofmonopolisticcompetitiontomodeltheemergenceoflocalspecializedsuppliers.Inthepreviousliterature,e.g.,Krugman[14],thereisasingletypeofmanufac-turedfinalgood.Inthispaper,thereisacontinuumoftypesoffinalgoodsthatvaryintheirproductionrequirementfortheoutputoflocalspecial-izedsuppliers.Low-tierproductshaveanegligiblerequirementforsuchoutput.High-tierproductshaveasubstantialrequirement.InSection2,Iarguethatthiscontinuumofproducttypescanbeinterpretedasacontin-uumofqualitytypes.Highqualitygoodsaremoresophisticatedandtendtohaveagreaterrequirementfortheoutputoflocalspecializedsuppliersthanlowqualitygoods.Inthemodel,therearetwolocations,theNorthandSouth.TheSouthhasanaturaladvantageforproductionintheindustry,due,perhaps,toasuperiorclimate.Becauseofsomehistoricalaccident,theindustryisini-tiallyintheNorth.Thepaperaddressestwoquestions.DoestheindustryeventuallymigratetotheSouth?Ifso,howdoestheindustrymigrate?Ifamigrationtakesplace,thisishowitgoes.Producersofthelowestqualityproducts;i.e.,theproducersthatplacelittleweightonaccesstolocalsuppliers,immediatelymoveSouthtotakeadvantageofthebetterclimate.AsthisbottomendofthequalityspectrumbuildsupintheSouth,anetworkoflocalsuppliersbeginstoemergetocatertothelocalproductionintheSouth.TheemergenceofthissuppliernetworkintheSouthattractsproductsformerlyproducedintheNorthwithamediumrequirementfor1Foranalternativeview,seeLeibowitzandMargolis[15].242thomasj.holmesaccesstolocalsuppliers.AstherangeofproductsproducedintheSouthexpands,thesupplierbaseintheSouthgrows.Butasthesupplierbasegrows,theSouthbecomesmoreattractivetohigher-endproducts,andtherangeofproductsproducedintheSouthexpandsevenmore.Ultimately,throughthissequenceofevents,theentireindustrymigratestotheSouth,despitetheinitialpullofagglomerationeconomiesintheNorth.IfthenaturaladvantageoftheSouthisverysmall,itispossibleinthismodelforpartoftheindustrytogetstuckintheNorth.Thegoodswiththelowestproductionrequirement