Agglomeration and growth: The effects of commuting costs

We present a model of industrial location and endogenous growth with congestion costs. According to the interplay between knowledge spillovers and commuting costs, we are able to obtain both a Krugman†type and a bell†shaped agglomeration outcome. In the first case, the economy experiences a permanent income inequality in the steady state and income divergence in the transitional dynamics. In the second case, we observe an enlargement of the industrial core of the economy with a strong catching up by the periphery. Welfare analysis shows that congestion creates (in the bell†shaped agglomeration case) a negative welfare effect on peripheral unskilled workers and it renders the agglomerated equilibrium Pareto inferior to dispersion.