Ratio Working Papers,
The Ratio Institute

Abstract: This paper investigates factors that determine the spatial concentration in the financial industry. Why does the financial industry have such a high spatial concentration? The theoretical framework is based on theories from regional economics, with a focus on agglomeration effects, externalities, and the regional clustering of an industry. The positive agglomeration effects arise from access to i) specialized labor, ii) specialized suppliers, and iii) knowledge dispersion (Marshall 1920). Jacobs (1961, 1969) contributes to a discussion of the role of cities (urban economies) in terms of innovations and entrepreneurship. The high degree of spatial concentration in the financial sector emphasizes the importance of local embeddedness, networks, face-to-face communication, knowledge spillovers, and spatial proximity for the organization of the financial industry. These factors accentuate the importance of local knowledge and the dispersion of knowledge, factors that have been thoroughly discussed and analyzed in the field of Austrian economics. Therefore, an Austrian view is included to examine the role of knowledge in the spatial concentration of financial centers. Scholars such as Hayek (1937; 1945) and Lachmann (1978 [1956]) contribute to understanding the use of knowledge in society.

Keywords: Spatial Concentration; Financial Industries; Knowledge; Information; Face-to-face communication

JEL-codes: B26; B53; D53

32 pages, February 28, 2012

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