Direct Communication, Costs of Networking and Localization of Technical Knowledge

We investigate the localization of technical knowledge in a setup where firms or researchers compete for the value of a preemptive innovation. All researchers could gain by sharing information due to the uncertainty of the arrival time of the discovery. As receiving information while withholding expertise improves the competitive position of the actor there is a short-run incentive not to cooperate. Informal trade of technical know-how in a matching market is brought about by pre-trade communication on the reputation of players and the refusal to disclose information to agents with a bad reputation. This community enforcement results without the players following contagious strategy profiles. If the communication on the reputation of players is associated with costs depending on geographic distances, researchers have a strong incentive to cluster in geographical space. The number and pattern of agglomerations depends on the initial distribution of firms over geographical space and relocation costs.