This paper develops microfoundations for the role that diversified cities play in fostering innovation. A simple model of process innovation is proposed, where firms learn about their ideal production process by making prototypes. We build around this a dynamic general-equilibrium model, and derive conditions under which diversified and specialized cities coexist. New products are developed in diversified cities, trying processes borrowed from different activities. On finding their ideal process, firms switch to mass production and relocate to specialized cities where production costs are lower. We find strong evidence of this pattern in establishment relocations across French employment areas 1993–1996

Used properly, the term 'new e-conomy' is warranted. Since 1995, there has been a wave of innovation associated with both the production and use of information technology that has been translated into improved US economic performance. In particular, there has been a substantial acceleration in trend total factor productivity growth. Most of this acceleration actually took place outside of the computer sector. Almost none of the acceleration was cyclical. There is now clear supportive evidence of an acceleration of productivity in service industries that are major purchasers of information technology such as finance and wholesale and retail trade. These gains reflect not only increased investment in information technology but also complementary innovations in business organization and policy. To be sure, as evidenced by recent financial market volatility, there have been speculative excesses, but these should not obscure the fundamental gains that have been made

A common claim in the nonrenewable resource literature is that improvements in technology may largely offset the effects of increasing scarcity over time. This study provides perhaps the first empirical evidence on this issue by analyzing the determinants of the average finding cost for additional petroleum reserves in the United States over the 19671990 period. Using a new index of the level of technology, our analysis suggests that technological change played a major role in allaying what would otherwise have been a sharp rise in the average cost of finding additional reserves of natural gas. The impact of technological change on finding costs for U.S. crude oil reserves has been more modest. To place our work in context, we note that in recent years there has been renewed interest in the causes and consequences of technological change. At the macroeconomic level, a huge literature modeling the impact of technological innovation on economic growth and living standards has emerged [see, e.g., Paul Romer (1990) and Gene M. Grossman and Elhanan Helpman (1991)]. At the micro level, increasingly sophisticated methods are being used to assess the links between technological change, productivity, and average or marginal costs at the sectoral level [see, e.g., Samuel Kortum and Saul Lach (1995)]. The potential effects of technological change in alleviating the increasing scarcity of nonrenewable resources are widely discussed in the resource and environmental economics literature. The simplest variant of the Harold Hotelling (1931) model predicts that nonrenewable resource prices should rise at a rate equal to the real rate of interest. It is well known, however, that

The expansion of variety in consumer and intermediate goods plays a central role in many theoretical models of growth. Examples include Paul M. Romer (1990), Gene M. Grossman and Elhanan Helpman (1991 Ch. 3), and Robert J. Barro and Xavier Sala-i-Martin (1995 Ch. 6). In contrast, evidence on variety growth is very sparse. Jerry A. Hausman (1997) and Amil Petrin (1999) estimate the consumer gains to the introduction of specific brands of specific products (Apple-Cinnamon Cheerios and minivans, respectively). Similarly, Manuel Trajtenberg (1989) and Hausman (1999) estimate the gains from computed tomography (CT) scanners and cellular phones, respectively. However, quantifying the aggregate importance of new products on a good-by-good basis is probably not feasible. In particular, it is not possible to obtain data to estimate consumer surplus from the myriad of new models and features that are continually introduced. Reflecting these problems, the Boskin Commission (1996) offers only a few, often speculative, calculations in addressing the issue of variety gains. We take an indirect approach. We exploit how new varieties alter spending patterns, drawing expenditures away from comparatively dormant categories. Table 1 illustrates for a few cases of dramatic product innovations. As the table shows, rapid growth in spending on cable television since 1980 has fueled a broad increase in spending on television, despite a relative decline in spending on television sets. Similarly, VCR’s and movie rentals have spurred an increase in overall spending on movies at home and theaters, personal computers have brought about increased spending on home audio and video equipment, and cell phone services have been responsible for the increased spending on all telephone services. In the 20 years prior to the ascendance of these major new items, all of their categories were stagnant or in relative decline. More generally, we find that consumers have been rapidly shifting away from “static” categories (i.e., those in which there has been little variety or quality gain). This shift far exceeds what can be explained by the impact of relative Engel curves or relative price changes. Our results suggest that variety has increased by perhaps 1 percent per year over the past 40 years. More striking is that most of this growth occurs in just the past 20 years—explaining our title. Looking across 106 more detailed categories, we relate share changes to U.S. Bureau of Labor Statistics (BLS) item-substitution rates. Itemsubstitution rates measure how often the BLS replaces an item in the pricing basket with another model because the former has disappeared from a sample outlet. Frequent BLS item substitutions predict increased spending on a category, even after controlling for Engel-curve, price, and demographic effects. This suggests that new varieties do increase spending on a category, as well as drive out or replace incumbent varieties. Compared to Engel curves, we find that item-substitution rates are a more reliable predictor of shifts in spending shares across goods. Related to this, we question Bruce W. Hamilton (1998) and Dora Costa’s (2000) reliance on food’s share and food’s Engel curve to measure the true rate of U.S. economic growth