Coping with increasing tides: Evolving agglomeration dynamics and technological change under exacerbating hazards

By 2050 about 70% of the world’s population is expected to live in cities. Cities offer spatial economic advantages that boost agglomeration forces and innovation, fostering further concentration of economic activities. For historic reasons urban centers cluster along coasts, which are prone to climate-induced flooding and sea level rise. To explore trade-offs between agglomeration economies and hazards increasing with climate change, we develop an evolutionary agent-based model with heterogeneous boundedly-rational agents who learn and adapt to a changing environment. The model combines migration decision of both households and firms between safe Inland and hazard-prone Coastal regions with endogenous technological learning and economic growth. Flood damages affect Coastal firms hitting their labour productivity, capital stock and inventories. We find that the model is able to replicate a rich set of micro- and macro-empirical regularities concerning economic and spatial dynamics. Without climate-induced shocks, the model shows how lower transport costs favour the Coastal region fueling the self-reinforcing and path-dependent agglomeration processes. We then introduce five scenarios of floods characterized by different frequency and severity to study the complex interplay of hazards with agglomeration patterns affecting the performance of the overall economy. We find that when shocks are mild or infrequent, they negatively affect the economic performance of the economy. If strong flood hazards hit frequently the Coastal region before agglomeration forces trigger high levels of the waterfront urbanization, firms and households can timely adapt and migrate landwards, thus averting the adverse impacts of climate shocks on the whole economy. Conversely, in the presence of climate tipping points where the frequency and magnitude of flood hazards abruptly intensifies, we find that economic activities remain trapped in the hazard-prone region, generating lock-ins and leading to a harsh downturn of the overall economy.