DP7126 Economic Geography: a Review of the Theoretical and Empirical Literature

Author(s): Stephen J. Redding
Publication Date: January 2009
Keyword(s): Home Market Effect, Market Access, Multiple Equilibria, New Economic Geography
JEL(s): F12, F14, O10
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=7126

This paper reviews the new economic geography literature, which accounts for the uneven distribution of economic activity across space in terms of a combination of love of variety preferences, increasing returns to scale and transport costs. After outlining the canonical core and periphery model, the paper examines the empirical evidence on three of its central predictions: the role of market access in determining factor prices, the related home market effect in which demand has a more than proportionate effect on production, and the potential existence of multiple equilibria. In reviewing the evidence, we highlight issues of measurement and identification, alternative potential explanations, and remaining areas for further research.