Geographic Fragmentation in a Knowledge Economy: Theory and Evidence from the United States

We study how the rise in cross-city joint productions (or “geographic fragmentation”)—facilitated by advancements in communication technologies—shapes the spatial skill distribution in the United States. Motivated by observations that large cities became disproportionately skill intensive and that industries more likely to fragment underwent greater increases in spatial skill dispersion between 1980 and 2013, we propose a spatial equilibrium model with cross-city production and heterogeneous skills to study how geographic fragmentation affects spatial skill distribution. In addition to delivering the observed facts, the model predicts that reductions in bilateral communication frictions increase skill shares in large cities and reduce them in smaller ones. Through a novel instrumental variable approach, we provide empirical validation of the model’s prediction. We then use the model to explore the quantitative consequences of counterfactual changes in internet qualities on skill redistribution and real wages.