Spillovers, Absorptive Capacity and Agglomeration

I study knowledge spillovers in an industry where firms are heterogeneous in their ability to adopt knowledge (absorptive capacity). I set up a model in which firms choose locations anticipating potential gains and losses from other firms’ RD firms that have higher absorptive capacity are sorted into more agglomerated counties; ignoring firm heterogeneity leads to biased estimates of gains from spillovers; spillovers play an important role in explaining the geographic distribution of firms, but only within regions with high R&D activity.