Agglomeration, Knowledge Spillovers, and Corporate Investment

Firm agglomeration is positively correlated with productivity, and it exhibits significant heterogeneity across industries. Yet, the connection between agglomeration and corporate investment remains underexplored. We develop a model of information sharing which predicts that knowledge-intensive industries and industries with more uncertainty benefit the most from agglomeration due to the subsequent improvement in project selection. Using simulated counterfactuals, we find a strong positive relationship between industry uncertainty/knowledge intensity and the proximity of headquarters (patent inventors). Additionally, we exploit techniques designed to estimate peer effects, and we find that the strength of investment externalities is positively related to agglomeration and uncertainty/knowledge intensity