New Economic Geography, Empirics, and Regional Policy

There are doubts about the effectiveness of regional policy. Well known are the vain attempts of Italy to bridge the gap between the Mezzogiorno and the North, of Germany to bridge the gap between the Neue Länder and the West, and of the European Commission to reduce regional disparities in general. We validate a salient explanation for the lack of effectiveness: agglomeration advantages lock business activity in relatively prosperous core regions, even though wages and production costs tend to be higher there. On the basis of the `New Economic Geography' - a set of general equilibrium models that focus on location choice - in combination with descriptive statistics and econometric analysis, we conclude that the European economic geography is characterized by a network of local and stable core-periphery systems. Since regional policy tend to be insufficient to counter centripetal market forces, disparities between cores and their peripheries at a subprovincial level of regional aggregation are with us to stay. Moreover, if regional policy does have an impact, it may be adverse as some policies targeted on peripheral regions trigger location choices in favour of core regions.