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Localization Economies, Vertical Organization and Trade

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  • Gordon H. Hanson

Abstract

This paper develops a model of regional production networks based on localization economies. I consider an industry with two activities: one with location-specific external economies, the other with constant returns. Under autarky, localization economies imply the formation of an industry center. Agglomeration drives up wages in the center, causing the constant returns activity to disperse to outlying regions. Trade recreates the regional production network on a global scale. I apply the model to data from the Mexican apparel industry. Estimation results on Mexico's pre- and post-trade regional apparel wage structure are consistent with localization economies. Implications for the North American Free Trade Agreement (NAFTA) are discussed.

Suggested Citation

  • Gordon H. Hanson, 1994. "Localization Economies, Vertical Organization and Trade," NBER Working Papers 4744, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:4744
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    1. Krugman, Paul, 1991. "Increasing Returns and Economic Geography," Journal of Political Economy, University of Chicago Press, vol. 99(3), pages 483-499, June.
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    4. Krugman, Paul & Venables, Anthony J., 1996. "Integration, specialization, and adjustment," European Economic Review, Elsevier, vol. 40(3-5), pages 959-967, April.
    5. Dwivedi, T. D. & Srivastava, V. K., 1978. "Optimality of least squares in the seemingly unrelated regression equation model," Journal of Econometrics, Elsevier, vol. 7(3), pages 391-395, April.
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    More about this item

    JEL classification:

    • E14 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Austrian; Evolutionary; Institutional
    • O18 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Urban, Rural, Regional, and Transportation Analysis; Housing; Infrastructure

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