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.