DP1845 Agglomeration and Endogenous Capital
|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.