The spatial distribution of economic activity is strongly linked to the structure of the urban system. The origin and development of the spatial pattern of this system is separated into two stages, the diffusion of settlements and their potential transition to urban status. The theoretical framework incorporates the influence of geographic characteristics and location interdependence as central mechanisms in both stages. Their relative importance for both is tested empirically with the historical settlement pattern in Saxony as a case study. After investigating with a spatial point process approach how geographic endowments and location interdependence shape the spatial distribution of all settlements within the state, I apply a spatial probit estimation to determine how these endowments and interdependence, which resembles a market access effect, influence the likelihood that a settlement transitioned to a town. The results indicate that geographic factors are the primary influence on the spatial distribution and urbanization of settlements, while the spatial relationship has a significant but small clustering impact. Furthermore the determinants of the spatial distribution of size based and institutional towns are compared, demonstrating that the influence of location interdependence is quite close, while there are some significant differences in the influence of physical geography
