AbstractOur analysis begins with an empirical investigation of how employment concentration in industries and occupations across regions of the United States has changed over time and how regional specialization has changed. Results show that industry concentration and specialization indices have fallen, while occupation concentration and specialization indices have risen. Using this background as motivation, we develop a model in which the comparative advantage of regions lies in their productivity of supplying functions such as law, finance, advertising and engineering, to multiple sectors. Productivity differences specific to region functions shape the location decisions of industries that use multiple functions and hence determine patterns of regional specialization both in functions and in sectors. A key parameter is the cost of sourcing functions from a different region (fragmentation costs), and we show that a fall in this cost mimics the data: sector concentration and regional specialization fall and function concentration and specialization rise. At high fragmentation costs, regional comparative advantage in sectors determines general equilibrium analogous to a Heckscher–Ohlin model (HO). At low fragmentation costs, comparative advantage in functions drives an equilibrium that has little resemblance to a HO world.