A Theory of the Spatial Network

Abstract:     
This paper proposes a new approach to city formation based on network games. The main driving force of population agglomeration is uncompensated knowledge spillovers. Because knowledge can be transmitted only when both parties are linked in the etwork sense, the network formation approach is a natural framework to define and examine the underlying spatial configuration of the equilibrium. While it is beneficial to be connected to take advantage of knowledge transmission from other locations, maintaining a link is costly. A location may take the role of a core, serving as a knowledge aggregation and transmission node for other connected peripheral locations. We find that a spatial equilibrium may feature monocentric, multicentric, urban-rural, or multiple urban areas. We examine under which conditions a particular spatial configuration may emerge, and perform comparative statics with respect to changes in knowledge spillover, link maintenance, urban land rent, rent gradient, and urban unemployment parameters.

Keywords: Spatial Networks, Knowledge Spillovers, Locational Equilibrium, Urban Configuration

JEL Classifications: D20, C71, O33

Working Paper Series