Spatial competition, innovation and institutions: the Industrial Revolution and the Great Divergence

  • Klaus DesmetEmail author
  • Avner Greif
  • Stephen L. Parente


This paper considers the possible contribution of spatial competition to the Industrial Revolution and the Great Divergence. Rather than exclusively focusing on the incentives of producers to adopt labor-saving technology, we also consider the incentives of factor suppliers’ organizations such as craft guilds to resist. Once we do so, industrialization no longer depends on market size per se, but on spatial competition between the guilds’ jurisdictions. We substantiate our theory’s claim of spatial competition being an important channel for industrialization (i) by providing historical evidence on the relation between spatial competition, craft guilds and innovation, and (ii) by showing that the calibrated model correctly predicts the timings of the Industrial Revolution and the Great Divergence.


Industrial Revolution Great Divergence Craft guilds Spatial competition Inter-city competition Market size Endogenous institutions Innovation Adoption of technology 

JEL Classification

N10 O11 O14 O31 O43 



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Authors and Affiliations

  1. 1.Department of Economics and Cox School of BusinessSouthern Methodist UniversityDallasUSA
  2. 2.NBERCambridgeUSA
  3. 3.CEPRLondonUK
  4. 4.Department of EconomicsStanford UniversityStanfordUSA
  5. 5.Department of EconomicsUniversity of Illinois at Urbana-ChampaignUrbanaUSA

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