Spatial Agglomeration of Firms: Theory and Application for Industrial District 22@ of Barcelona 45th Congress of the European Regional Science Association, Amsterdam, 23-27 August 2005 Mascarilla O., 1 University of Barcelona and CEI, Barcelona, Spain, Yegorov Y., Institute for Advanced Studies, Vienna, and CEI 10 June 2005 Abstract The goal of this paper is theoretical analysis of the complex process of agglomeration of firms into industrial districts when cities are also competing for them. Positive spillovers tend firms to locate in the same area, while congestion effects limit this process. Thus, for any given city there exists an optimal number of firms. If there are fewer firms, we face competition under increasing returns to scale, with path dependence effects, described by W.B.Arthur (1994) and R.Camagni (2005). Hence, if firms are relatively scarce, not all cities would be occupied by firms at optimal level. The problem of a firm is to choose an optimal city expecting rational behaviour of other firms. Such factor as office rent depend on city size, while wage cost and spillover effects depend also on the number of firms there. Firms choose to agglomerate in those cities where after optimal entry their profits will be maximized. Under certain conditions for parameter set, there exists an equilibrium allocation, where all firms are located in the cities with better parameters. Since cities are different, their attractiveness also differ. The second goal of this paper is the empirical analysis of advantages and disadvantages of emerging industrial district 22@ in Barcelona in comparison with other European industrial districts (like Greater London, Ille de France, Dublin, etc). At present, London is the leader in attractiveness among European cities. But this situation is unstable and depends on city development. At present, Barcelona needs state intervention that would create critical mass of firms in this area. On empirical side, we analyse the potential effect of investment in infrastructure in Barcelona to improve its attractiveness. In particular, we are interested in the factors that can be responsible for growing density of firms located in 22@ district. The methodology of empirical part includes survey for firms potentially interested in location in this district. Keywords: Location of firms, External economies, Hierarchy of cities. JEL Classification: L6, R3, R12. 1 This paper is prepared for presentation at ERSA annual meeting, Amsterdam, 23-27 Agoust 2005. It was partly financed by CICYT SEC2002-03212. 1