Does History Matter Only When It Matters Little? The Case of City-Industry Location

Abstract

When will an industry subject to agglomeration economies move from an old, high-cost site to a new, low-cost site? It is argued that history, in the form of sunk costs resulting from the operation of many firms at a site, creates a first-mover disadvantage that can prevent relocation. It is demonstrated that developers of industrial parks can partly overcome this inertia through discriminatory pricing of land over time, and empirical evidence is provided that they actually engage in such behavior. It is also shown that other aspects of developer land-sale strategy can be a source of information on the nature of interfirm externalities.