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Localization Economies, Vertical Organization, and Trade

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  • Hanson, Gordon H

Abstract

This paper develops a model of regional production networks based on localization economies. I consider an industry with two activities: one with location-specific external economies, the other with constant returns. Under autarky, localization economies imply the formation of an industry center. Agglomeration drives up wages in the center, causing the constant returns activity to disperse to outlying regions. Trade recreates the regional production network on a global scale. I apply the model to data from the Mexican apparel industry. Estimation results on Mexico's pre- and post-trade regional apparel wage structure are consistent with localization economies. Implications for the North American Free Trade Agreement (NAFTA) are discussed.

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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 86 (1996)
Issue (Month): 5 (December)
Pages: 1266-78

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Handle: RePEc:aea:aecrev:v:86:y:1996:i:5:p:1266-78

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  1. Krugman, Paul, 1991. "Increasing Returns and Economic Geography," Journal of Political Economy, University of Chicago Press, vol. 99(3), pages 483-99, June.
  2. Krugman, Paul & Venables, Anthony J., 1993. "Integration, Specialization and Adjustment," CEPR Discussion Papers 886, C.E.P.R. Discussion Papers.
  3. Dwivedi, T. D. & Srivastava, V. K., 1978. "Optimality of least squares in the seemingly unrelated regression equation model," Journal of Econometrics, Elsevier, vol. 7(3), pages 391-395, April.
  4. James Markusen & Thomas Rutherford, 1994. "Discrete plant-location decisions in an applied general-equilibrium model of trade liberalization," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 130(1), pages 133-151, March.
  5. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May.
  6. Paul Krugman & Anthony Venables, 1993. "Integration, Specialization, and the Adjustment," NBER Working Papers 4559, National Bureau of Economic Research, Inc.
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