DP1575 The Rise and Fall of Regional Inequalities

Author(s): Diego Puga
Publication Date: February 1997
Keyword(s): Agglomeration, Linkages, Migration, Regional Integration
JEL(s): F12, F15, R12
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=1575

This paper analyses how the degree of regional integration affects regional differences in production structures and income levels. With high transport costs, industry is spread across regions to meet final consumer demand. As transport costs fall, increasing returns interacting with labour mobility and/or input-output linkages between firms create a tendency for the agglomeration of increasing returns activities. When workers migrate towards locations with more firms and higher real wages, this intensifies agglomeration. When workers do not move across regions, further reductions in transport costs make firms increasingly sensitive to wage differentials, and may lead industry to spread out again.