Spatial competition, innovation and institutions: the Industrial Revolution and the Great Divergence

Abstract

This paper advances a theory in which the intensity of inter-city competition determines both the incentives of rms to adopt labor-saving technologies and the incentives of specialized workers to resist them. By providing historical evidence of the relation between spatial competition, guild resistance and innovation in England and China, it argues that the theory is plausible for understanding the timing of industrialization in both countries. Using data on inter-city competition, it shows that the theory calibrated to England in the pre-1600 era is consistent with an end of guild resistance and a start of industrialization in England by the beginning of the nineteenth century. The calibrated model also correctly predicts economic stagnation in China through the early twentieth century. The theory can therefore account for both the Industrial Revolution and the Great Divergence.