Knowledge exchange, matching, and agglomeration

Despite wide recognition of their significant role in explaining sustained growth and economic development, uncompensated knowledge spillovers have not yet been fully modeled with a microeconomic foundation. This paper illustrates the exchange of knowledge as well as its consequences for agglomerative activity in a general-equilibrium search-theoretic framework. Agents, possessing differentiated types of knowledge, search for partners to exchange ideas in order to improve production efficacy. Contrary to previous work, we demonstrate that a decentralized equilibrium may be underpopulated or overpopulated and underselective or overselective in knowledge exchange, compared to the social optimum. (c) 2006 Elsevier Inc. All rights reserved.