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Modelling the Folk Theorem: A Spatial Cournot Model with Explicit Increasing Returns to Scale

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  • Sylvain Barde

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Abstract

This paper attempts to model directly the "folk theorem" of spatial economics, according to which increasing returns to scale are essential for understanding the geographical distributions of activity. The model uses the simple structure of most New Economic Geography papers, with two identical regions, a costlessly traded agricultural sector and a manufacturing sector subject to iceberg costs. This simple setting isolates IRS in manufacturing production function as the only potential agglomerating force. This implies that an unstable symmetric equilibrium means IRS cause agglomeration. The central result is that while a CRS manufacturing sector will always stay at the symmetric equilibrium, the presence of IRS in manufacturing causes the symmetric equilibrium to become unstable and agglomeration becomes the only long run equilibrium for the system.

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File URL: ftp://ftp.ukc.ac.uk/pub/ejr/RePEc/ukc/ukcedp/0701.pdf
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Bibliographic Info

Paper provided by Department of Economics, University of Kent in its series Studies in Economics with number 0701.

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Date of creation: Jan 2007
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Handle: RePEc:ukc:ukcedp:0701

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Postal: Department of Economics, University of Kent at Canterbury, Canterbury, Kent, CT2 7NP
Phone: +44 (0)1227 764000
Fax: +44 (0)1227 827850
Web page: http://www.ukc.ac.uk/economics/

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Keywords: Agglomeration; increasing returns to scale; imperfect competition;

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