How and why do agglomerations emerge? While economic historians emphasize trade and economic geographers emphasize variety, we still don’t understand the role of coordination. I fill this gap by extending the model of Fudenberg and Ellison (2003) to formalize Smith’s (1776) theory of agglomeration. I then test the model in a laboratory experiment and find individuals tend to coalesce purely to coordinate exchange, with more agglomeration when there is a larger variety of goods in the economy. I also find that tying individuals to the land reduces agglomeration, but magnifies the effect of variety.
Adamson, J. (2018). Agglomeration and the extent of the market: An experimental investigation into spatially coordinated exchange. ESI Working Paper 18-12. Retrieved from https://digitalcommons.chapman.edu/esi_working_papers/250