Abstract
We analyze firms' incentives to cluster in an industrial district to benefit from reciprocal technology spillovers. A simple model of cumulative innovation is presented, where technology spillovers arise endogenously through labor mobility. It is shown that firms' incentives to cluster are the strongest when the following three conditions are met: (1) the growth potential of an industry is high; (2) competition in the product market is relatively soft; (3) the probability of a single firm to develop an innovation is neither very high nor very low. Trade secret protection based on punitive damages is, except in some extreme cases, beneficial for firms' profits, stimulates clustering, and is not an impediment to technology spillovers.
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