On the evolution of a multi-regional system
We study the effects of a decrease in trade costs on the spatial distribution of industry in a multi-regional economy, when a rise in the regional population of workers generates higher urban costs. We show that high and low trade costs imply that all regions involve a positive share of the industrial sector. When urban costs are linear, there exists a stable equilibrium for almost all values of trade costs. Furthermore, as trade costs fall, there is a path of stable equilibria such that the industry is, first, agglomerated into a decreasing number of regions and, then, dispersed among a growing number of regions. The second phase arises because of the increasing urban costs associated with the process of agglomeration.
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