DP1845 Agglomeration and Endogenous Capital

Author(s): Richard Baldwin
Publication Date: March 1998
Keyword(s): Economic Geography, Neoclassical Growth, Trade and Growth
JEL(s): F13, F20, F43
Programme Areas: International Macroeconomics, International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=1845

The ?new? economic geography focuses on the footloose-labour and the vertically-linked industries models. Both are complex, since they feature demand-linked and cost-linked agglomeration forces. The paper presents a simpler model, where agglomeration stems from demand-linked forces arising from endogenous capital with forward-looking agents. The model?s simplicity permits many analytic results (rare in economic geography). Trade-cost levels that trigger catastrophic agglomeration are identified analytically, liberalization between almost equal-sized nations is shown to entail ?near-catastrophic? agglomeration, and Krugman?s informal stability test is shown to be equivalent to formal tests in a fully specified dynamic model.