"Networking off madison ave" - Arzaghi and Henderson Look at rent gradient to estimate the value of localized knowledge spillovers rent 2 premium normal . .. rent 9 streets distance 0 distance from center mm center Lin Tian/Adam Smith Division of Labor: - Greater for firms production complex products A( N,Z) A ( N' , Z ) A(NZ) if Z > Z' and N > N' A ( N' , Z ) - Where A is the productivity Z the complexity and N the division of labor - Coordination costs lower in large cities C(N,L) C( N',L) C( N,L') - C(N', L' ) if L > L' and N > L' - Where C is the coordination costs and L is the size of the city - Therefore: complex products sort into large cities, further increasing division of labor - Rents rise, less complex firms happy to stay in smaller city