Knowledge barter in cities

Since Marshall [Principles of Economics (1890) MacMillan, London], it has been common for economists to model knowledge transfers as exogenous spillovers. However, there are many instances of knowledge transfers that are deliberate and reciprocal. This paper models these endogenous knowledge transfers and shows that endogenous knowledge barter is fundamentally different than exogenous spillovers. Holding city size fixed, we show that knowledge transfers may arise as a kind of barter when the value of knowledge is verifiable ex ante. Knowledge barter can also take place when the value of the knowledge transferred is verifiable only ex post if the interaction is repeated and if discount rates are not too high. However, the sustainability of knowledge barter depends crucially on city size. When city size is large, it is easier for an agent who withholds knowledge to go unpunished. This means that the sustainable level of knowledge barter is smaller in a large city. This result suggests that the knowledge-agglomeration relationship is non-monotonic. The loss of cooperative knowledge exchange that occurs as city size grows can be a limit to optimum and equilibrium city sizes. (C) 2004 Elsevier Inc. All rights reserved.