The New Economic Geography : an overview

1. The New EconomicGeography:an overview COST Action IS1104 Urbino 18-19 Settembre 2012

2. Outline • Introduction • Krugman’scookbook: mainingredients of NEG models • Krugman’s story: self-reinforcingagglomeration • NEG Families, modifications and extensions • Researchquestions

3. Section I Introduction

4. Fujita and Krugman: • “The defining issue of the new economic geography is how to explain the formation of a large variety of economic agglomeration (or concentration) in geographical space. Agglomeration or the clustering of economic activity occurs at many geographical levels, having a variety of compositions.

5. For example, one type of agglomeration arises when small shops and restaurants are clustered in a neighborhood. • Other types of agglomeration can be found in the formation of cities, all having different sizes, ranging from New York to Little Rock; in the emergence of a variety of industrial districts; or in the existence of strong regional disparities within the same country. • At the other extreme of the spectrum lies the core-periphery structure of the global economy corresponding to the North-South dualism.

6. It is also important to notice that all this types of agglomeration at different levels are embedded in a larger economy, altogether forming a complex system.” (Fujita and Krugman, 2004, Papers in Regional Science)

7. The aim of the Action is to provide a betterunderstanding of the EU as a complex, multi-level, evolvinggeographicalsystem, takingdulyinto account the dynamicprocessesoccuringwithinsuch a system and to developimprovedstrategies for EU regionalpolicies

9. NEG Central question • How does the spatialdistribution of industrial activity look like in the long-run? • Equallydistributedamongregions • Agglomerated in oneregion • Unevenlydistributed over the regions

10. Section II KruGman’sCoookBook: MainIngrEdients OF NEG MODELS

11. General Equilibrium Model (2 x 2 x 2) • 2 symmetric and spatially homogeneous regions • 2 sectors (M)anufacturing and (A)griculture A perfect competion ; M imperfect competition • Two factors of production (mobile and immobile) • Full interdependence across (goods and labour) markets

12. Increasing returns and imperfect competition • Dixit-Stiglitz monopolistic competition • No interaction / identical firms • Product differentiation/market segmentation • Production technology: a fixed component determines decreasing average cost • Price: constant mark-up over marginal costs • Larger production implies higher profit

13. Consumer’s preferences • Cobb-Douglas preferences across M and A goods (fixed shares of income allocated to each sector) • CES preferences across M varieties (love for variety) • Cheaper and/or more numerous goods increase welfare

14. Distance and trade • Iceberg transportcosts (Samuelson, 1952, Economic Journal) • Transportcost: exogenousparameterthatincreasespriceatdestination • For notationalconvenience «tradefreenessparameter (between 0 and 1)» • Tradeisbeneficialbecauseitallowsaccess to otherregionalmarkets • However, location isalsoimportantsinceprofits are higherwherethe local market isbigger (lowertransportcosts)

15. Factor mobility • Induced by differentials in factor rewards (wages, profits) • The dynamicprocess of migration/relocationisgradual over time and adaptive • Typically in continuous time • Link between short and long-runanalysis • Migration determines the long termspatialallocation of economicactivities (the regional shares; whereas the overallamount of productivefactorsisgiven)

16. Section III Krugman’s Story: Self reinforcingagglomeration

18. Pivotal: Size of local market for a single firmdepends: • Overall market size in the region (increasesit) • Number of firms in the region (reducesit)

19. Thoughtexperiment • onefactorunit (i.e. manufacturing workers) and the correspondingfirmmove from region 1 to region 2 • Overallsize of the market in 1 increases - • Market-access or market-sizeeffect (agglomeration force):monopolisticfirms locate in the largest market whereaverage production costislower and factorrewards are higher • Number of firmsincreases in 1 aswell - • Cost of living effect (agglomeration force): the local production increases and goods are cheaper • Market crowding or market competitioneffect (spreading force): firms locate in regions with less competitors

20. Self-reinforcingprocess 1 • Demandlinkedcircularcausality The productive factor and its owner move together:

21. Self-reinforcingprocess2 • Cost-linkedcircularcausality The productive factor and its owner move together

22. Stabilizing force • Competionbetweenfirms

23. Ifagglomerationforcesexceeddispersionforces. Thisleads to full agglomeration Ifdispersionforcesexceedagglomerationforcesthisleads to symmetricdistribution

25. z

30. SectionIV NEG Families, Modifications and Extensions

31. NEG families: differentiated according to which factor is interregionally mobile • Main NEG Variants: most used in the literature • Non exhaustive taxonomy of existing modifications and extensions

32. NEG Families • Core-Periphery (CP) model (Krugman, 1991, JPE) mobile factor: manufacturing workers immobile factor: agricultural workers technology: M workers both variable and fixed component • Footloose entrepreneur (FE) model (Forslid & Ottaviano, 2003, JEG) mobile factor: entrepreneurs/human capital immobile factor: unskilled workers production technology: entrepreneur only fixed component (simpler) • Footloose capital (FC) model (Martin & Rogers, 1995, JIE) mobile factor: physical capital immobile factor: workers technology : physical capital entersonlyfixed component (simpler) no circularcausality (muchsimpler)

33. NEG mainvariants • Constructed capital (CC) model (Baldwin, 1999, EER) - mobile or immobile endogenous physical capital - circularcausality via capital construction and destruction maylead to growth (growthpoles / growthsinks) • Vertical linkages (VL) model (Venables, 1996, IER) - intermediate manufacturing goodsenter in production - circularcausality via demand and supplylinkages (supplier of intermediate inputs locate in larger output markets/ firms locate where the number of supplier of intermediate inputsislargerand production costslower) • Global and local spillovers (GS and LS) models (Martin & Ottaviano, 1999, EER; Baldwin, Martin and Ottaviano, 2001, JE Growth) - variants of the CC model thatallow for endogeousgrowth - localspillovers are a dispersion force

34. Taxonomy of extensions 1

35. Taxonomy of extensions 1

36. Taxonomy of extensions 2

37. Taxonomy of extensions 2

38. Section V ResearCHQuestions

39. Researchtopic 1 • To represent the economy as a multi-regional Network with more ‘realistic’ features. Suggested preliminary steps: • Search for the most suitable analytical framework • Identification of EU regional specificities (also through data collection, screening and analysis) • Identification of the network structure (type of links, strength and number of connections) • Implementation of a specific software for the discovery of the network nature and statistical properties • Simulation exercises and comparison with real data

40. Researchtopic 2 • To model more elaborated firm relocation decisions (in NEG modelsverysimplistic). Improvements (drawingalso from contributions by Dawid;Zou): • Can welearnsomethingfrom the behaviouralliterature on strategicswithching in (financial) markets (chartist vs fundamentalists, discrete choicemodels, replicatordynamics, experiment on learning, new experiments on spatialdecisions)? • Can welearnsomething from the much more elaborate modelling of IO (strategicinteraction, heterogeneousfirm, continuousspace)? • Can we incorporate financialmarkets and itsrole in the firm (re-)location decision?

41. Researchtopic 3 • To identify determinants of regional attractiveness not included in NEG models. • for a firm several factors (such as local government quality, crime rates, access to credit, legislation, degree of scholarization of the workforce and so on) may affect relocation. • Similarly, factorsdifferent from wages or remunerationsthatmayaffectworkersand human capital migration are various (provision of public servicies, housingprices, amenities, work environment, and so on) • These indicators can be very useful for a better understanding of the distribution of economic activities.

42. Researchtopic 4 • Literaturereviews: • To provide an exhaustivetaxonomy of the NEG literature. • To compare old and new approaches to geographicaleconomics

43. Thankyou for yourattention!