Spatial Externalities, R&D Spillovers, and Endogenous Technological Change

We incorporate the spatial dimension into a standard expanding variety growth model based on R&D. The spatial interaction is introduced through spatial production spillovers, knowledge diffusion across space, and the capability for spatial heterogeneity. Forward-looking agents who operate in a finite continuous geographic area choose how much to innovate at each point in time and space. We study the properties of equilibrium and optimal allocations and argue that the characteristics are different from those of the non-spatial model, which alter the appropriate policy measures. We show how spatial interactions may lead regions with spatial homogeneity to differ in their growth rates and areas with spatial heterogeneity to share the same growth rates in the long run. Finally, we present numerical examples to illustrate the different dynamic outcomes and stylized facts from the US economy