Working Papers in Economics,
University of Gothenburg, Department of Economics

Abstract: This article tries to explain the exceptional levels of knowledge creation in certain industrial clusters, levels that are seemingly higher than what is implied by the usual models of atomistic agents who do not internalize externalities. For this purpose, we introduce reference-dependent utility into an OLG model of an industrial cluster where agents allocate resources between consumption and knowledge investments and where the latter spills over to the rest of the cluster. It is shown that if the agents in the cluster have altruistic preferences, they will internalize the externalities from knowledge investments and create more knowledge than if they were atomistic or considered their neighbors to be rivals.

Keywords: industrial cluster; reference-dependent utility; knowledge spillovers; relative consumption

JEL-codes: R13; R30

15 pages, First version: January 9, 2003. Revised: June 30, 2003.

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