Demand-driven knowledge clusters in a weightless economy by

That knowledge and technology matter for economic growth and performance is widely accepted. However, most formal analyses of knowledge-driven economies have focused on the supply side: productivity, and research and development. In modern high-tech economies where information and communications technologies figure prominently, just as important is the demand side of markets for goods akin to knowledge. This paper develops a model of knowledge cluster formation in a geographical space, driven by demand-side characteristics. Knowledge concentrations in space spontaneously emerge, even when physical distance and transportation costs are irrelevant. These clusters manifest in equilibrium as waves on a smooth, otherwise featureless, three-dimensional globe; they arise to resolve the tension between spatial spillover externalities and the costs of adapting to new sophisticated knowledge-products.