Labour pooling, labour poaching, and spatial clustering

When frims cluster in the same local labour market, they face a trade-off between the benefits of labour pooling (i.e., access to workers whose knowledge help reduce costs) and the costs of labour poaching (i.e., loss of some key workers to competition and a higher wage bill to retain the others). We explore this tradeoff in a duopoly game. Depending oil market size, on the degree of horizontal differentiation between goods, and on worker heterogeneity in tetras of knowledge transfer cost; we characterise the strategic choices of firms regarding locations, wages, poaching and prices. Our results show that co-location, although it is always efficient in our framework, is not in general the non-cooperative equilibrium outcome. (c) 2005 Elsevier B.V All rights reserved.