Employees ’ Break-offs and the Birth of Industrial Clusters 1 In (original) (raw)

Empirical observation suggests that several industrial clusters originate from employees who break off and locate their new firms close to former employers. The reasons for such a choice are complex and include a variety of costs’ considerations. We present a two-player three-stage simultaneous game with interdependent decisions concerning break-offs, deterrent compensations, location, and profit maximizing production outputs. The structure of the game explains under what conditions a break-off is desirable, what location’s choice makes it optimal, and why the break-off process may lead to the birth of a cluster. We demonstrate how changes in a firm’s marginal production/congestion cost, the level of R&D investment in a region, and market size, all influence the likelihood of break-offs and their subsequent location decisions. Our results provide a rationale for why, in industries in which technology plays a significant role, an increase in R&D investment in the region may encourage...