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Economic integration and agglomeration in a customs union in the presence of an outside region

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  • Pasquale Commendatore

    ()
    (University of Naples “Federico II”, Italy)

  • Ingrid Kubin

    ()
    (Department of Economics, Vienna University of Economics and Business)

  • Carmelo Petraglia

    ()
    (University of Basilicata, Italy)

  • Iryna Sushko

    ()
    (Institute of Mathematics, National Academy of Sciences of Ukraine)

Abstract

New Economic Geography (NEG) models do not typically account for the presence of regions other than the ones involved in the integration process. We explore such a possibility in a Footloose Entrepreneur (FE) model aiming at studying the stability properties of long-run industrial location equilibria. We consider a world economy composed by a customs union of two regions (regions 1 and 2) and an “outside region” which can be regarded as the rest of the world (region 3). The effects of economic integration on industrial agglomeration within the customs union are studied under the assumption of a constant distance between the customs union itself and the third region. The results show that higher economic integration does not always implies the standard result of full agglomeration of FE models. This incomplete agglomeration outcome is due to the fact that the periphery region keeps a share of industrial activities in order to satisfy a share of “external demand”. That is, the deindustrialization process brought about by economic integration in the periphery of the union is mitigated by the demand of consumers living in the rest of the world. In general, the market size of the third region affects the number of the long-run equilibria, as well as their stability properties. In addition to the standard outcomes of FE models, we describe the existence of two asymmetric equilibria characterised by unequal distribution of firms between regions 1 and 2, with no full agglomeration though. Interestingly, these equilibria are stable and therefore can be regarded as a likely long-run equilibrium state of the economy.

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Bibliographic Info

Paper provided by Vienna University of Economics, Department of Economics in its series Department of Economics Working Papers with number wuwp146.

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Date of creation: Oct 2012
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Handle: RePEc:wiw:wiwwuw:wuwp146

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Keywords: industrial agglomeration; three-region NEG models; footloose entrepreneurs;

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References

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  1. Olga Alonso-Villar, 2000. "Large metropolises in the Third World: an explanation," Working Papers 0004, Universidade de Vigo, Departamento de Economía Aplicada.
  2. Crozet, Matthieu & Brülhart, Marius & Koenig, Pamina, 2004. "Enlargement and the EU Periphery : The Impact of Changing Market Potential," HWWA Discussion Papers 270, Hamburg Institute of International Economics (HWWA).
  3. Monfort, Philippe & Nicolini, Rosella, 2000. "Regional Convergence and International Integration," Journal of Urban Economics, Elsevier, vol. 48(2), pages 286-306, September.
  4. Elisenda Paluzie, 2001. "articles: Trade policy and regional inequalities," Papers in Regional Science, Springer, vol. 80(1), pages 67-85.
  5. Krugman, Paul & Elizondo, Raul Livas, 1996. "Trade policy and the Third World metropolis," Journal of Development Economics, Elsevier, vol. 49(1), pages 137-150, April.
  6. repec:hal:journl:halshs-00096285 is not listed on IDEAS
  7. Villar, Olga Alonso, 1999. "Spatial distribution of production and international trade: a note," Regional Science and Urban Economics, Elsevier, vol. 29(3), pages 371-380, May.
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Cited by:
  1. Pasquale Commendatore & Ingrid Kubin & Carmelo Petraglia & Iryna Sushko, 2014. "Regional integration, international liberalisation and the dynamics of industrial agglomeration," Department of Economics Working Papers wuwp164, Vienna University of Economics, Department of Economics.

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