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Integration, Agglomeration and Welfare

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  • Pflüger, Michael P.

    () (University of Würzburg)

  • Suedekum, Jens

    () (Heinrich Heine University Düsseldorf)

Abstract

This paper studies the social desirability of agglomeration and the efficiency arguments for policy intervention in a simple, analytically solvable ‘new economic geography’ model with two trade integrating regions. The location pattern emerging as market equilibrium is “bubbleshaped”, i.e. it features dispersion of firms both at high and low trade costs and stable equilibria with partial agglomeration of firms in addition to core-periphery equilibria for intermediate levels of trade costs. Our central finding is that the market equilibrium is characterised by over-agglomeration for high trade costs and under-agglomeration for low trade costs. For very high and very low levels of trade costs as well as for an intermediate range of trade costs, the market equilibrium yields the socially optimal degree of agglomeration. An important implication of this result is that, on efficiency grounds, regional policy should foster the dispersion of firms for a range of high trade costs only, but agglomeration for a range of low trade costs. Hence, regional policies, such as those pursued by the European Union which are aimed at fostering dispersion in general, are counterproductive when trade integration is deep enough.

Suggested Citation

  • Pflüger, Michael P. & Suedekum, Jens, 2004. "Integration, Agglomeration and Welfare," IZA Discussion Papers 1326, Institute for the Study of Labor (IZA).
  • Handle: RePEc:iza:izadps:dp1326
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    Cited by:

    1. Arcalean, Calin & Glomm, Gerhard & Schiopu, Ioana, 2012. "Growth effects of spatial redistribution policies," Journal of Economic Dynamics and Control, Elsevier, vol. 36(7), pages 988-1008.
    2. Broll, Udo & Roldán-Ponce, Antonio & Wahl, Jack E., 2007. "Barriers to Diversification and Regional Allocation of Capital," Dresden Discussion Paper Series in Economics 14/07, Technische Universität Dresden, Faculty of Business and Economics, Department of Economics.
    3. Rainald Borck & Hyun‐Ju Koh & Michael Pflüger, 2012. "Inefficient Lock‐In And Subsidy Competition," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 53(4), pages 1179-1204, November.
    4. Hirte, Georg & Stephan, Andreas, 2014. "Regionale Beschäftigungswirkungen von öffentlichen Investitionen in Straßen- und Schieneninfrastruktur," Discussion Papers 2/2014, Technische Universität Dresden, "Friedrich List" Faculty of Transport and Traffic Sciences, Institute of Transport and Economics.
    5. Broll, Udo & Roldán-Ponce, Antonio & Wahl, Jack E., 2010. "Spatial allocation of capital: The role of risk preferences," Dresden Discussion Paper Series in Economics 03/10, Technische Universität Dresden, Faculty of Business and Economics, Department of Economics.
    6. Georg Hirte & Christian Leßmann, 2014. "Trade, Integration, and Interregional Inequality," CESifo Working Paper Series 4799, CESifo Group Munich.
    7. Matthias Wrede, 2013. "Heterogeneous skills and homogeneous land: segmentation and agglomeration," Journal of Economic Geography, Oxford University Press, vol. 13(5), pages 767-798, September.
    8. Schaeffer, Y. & Charlot, S., 2012. "Inequality aversion, income redistribution and economic geography," Working Papers 201204, Grenoble Applied Economics Laboratory (GAEL).
    9. Georg Hirte & Christian Lessmann, 2014. "Trade and Interregional Inequality," ERSA conference papers ersa14p304, European Regional Science Association.
    10. AKAMATSU Takashi & MORI Tomoya & OSAWA Minoru & TAKAYAMA Yuki, 2017. "Spatial Scale of Agglomeration and Dispersion: Theoretical foundations and empirical implications," Discussion papers 17125, Research Institute of Economy, Trade and Industry (RIETI).
    11. Kurata, Hiroshi & Nomura, Ryoichi & Suga, Nobuhito, 2011. "A Chamberlinian Agglomeration Model with External Economies of Scale," Discussion paper series. A 242, Graduate School of Economics and Business Administration, Hokkaido University.
    12. Fabien Candau, 2011. "Is Agglomeration Desirable?," Annals of Economics and Statistics, GENES, pages 203-227.
    13. Takashi Akamatsu & Tomoya Mori & Minoru Osawa & Yuki Takayama, 2017. "Spatial Scale of Agglomeration and Dispersion: Theoretical Foundations and Empirical Implications," KIER Working Papers 974, Kyoto University, Institute of Economic Research.
    14. Takashi Akamatsu & Tomoya Mori & Minoru Osawa & Yuki Takayama, 2017. "Spatial Scale of Agglomeration and Dispersion: Theoretical Foundations and Empirical Implications," KIER Working Papers 974, Kyoto University, Institute of Economic Research.
    15. Theresa Grafeneder-Weissteiner & Ingrid Kubin & Klaus Prettner & Alexia Prskawetz & Stefan Wrzaczek, 2012. "Coping with Inefficiencies in a New Economic Geography Model," VID Working Papers 1204, Vienna Institute of Demography (VID) of the Austrian Academy of Sciences in Vienna.
    16. G. Rayp & B. Vanbergen, 2009. "Are social welfare states facing a race to the bottom? A theoretical perspective," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 09/572, Ghent University, Faculty of Economics and Business Administration.
    17. Broll, Udo & Roldán-Ponce, Antonio & Wahl, Jack E., 2012. "Regional investment under uncertain costs of location," Dresden Discussion Paper Series in Economics 01/12, Technische Universität Dresden, Faculty of Business and Economics, Department of Economics.
    18. Jun Oshiro, 2011. "Tariff Policy and Transport Costs under Reciprocal Dumping," Discussion Papers in Economics and Business 11-17, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP).

    More about this item

    Keywords

    welfare; optimal agglomeration; economic geography; regional policy;

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F15 - International Economics - - Trade - - - Economic Integration
    • F22 - International Economics - - International Factor Movements and International Business - - - International Migration
    • R22 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Other Demand
    • R50 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Regional Government Analysis - - - General

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