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Economic integration and agglomeration in a customs union in the presence of an outside region

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  • Commendatore, Pasquale
  • Kubin, Ingrid
  • Petraglia, Carmelo
  • Sushko, Iryna

Abstract

New Economic Geography (NEG) models do not typically account for the presence of regions other than the ones involved in the integration process. We explore such a possibility in a Footloose Entrepreneur (FE) model aiming at studying the stability properties of long-run industrial location equilibria. We consider a world economy composed by a customs union of two regions (regions 1 and 2) and an "outside region" which can be regarded as the rest of the world (region 3). The effects of economic integration on industrial agglomeration within the customs union are studied under the assumption of a constant distance between the customs union itself and the third region. The results show that higher economic integration does not always implies the standard result of full agglomeration of FE models. This incomplete agglomeration outcome is due to the fact that the periphery region keeps a share of industrial activities in order to satisfy a share of "external demand". That is, the deindustrialization process brought about by economic integration in the periphery of the union is mitigated by the demand of consumers living in the rest of the world. In general, the market size of the third region affects the number of the long-run equilibria, as well as their stability properties. In addition to the standard outcomes of FE models, we describe the existence of two asymmetric equilibria characterised by unequal distribution of firms between regions 1 and 2, with no full agglomeration though. Interestingly, these equilibria are stable and therefore can be regarded as a likely long-run equilibrium state of the economy.

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  • Commendatore, Pasquale & Kubin, Ingrid & Petraglia, Carmelo & Sushko, Iryna, 2012. "Economic integration and agglomeration in a customs union in the presence of an outside region," Department of Economics Working Paper Series 146, WU Vienna University of Economics and Business.
    • Handle: RePEc:wiw:wus005:3668
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    Cited by:

    1. Commendatore, Pasquale & Kubin, Ingrid & Petraglia, Carmelo & Sushko, Iryna, 2014. "Regional integration, international liberalisation and the dynamics of industrial agglomeration," Journal of Economic Dynamics and Control, Elsevier, vol. 48(C), pages 265-287.
    2. Pasquale Commendatore & Ingrid Kubin & Pascal Mossay & Iryna Sushko, 2015. "Dynamic agglomeration patterns in a 2-country NEG model with 4 regions," Gecomplexity Discussion Paper Series 10, Action IS1104 "The EU in the new complex geography of economic systems: models, tools and policy evaluation", revised Feb 2015.
    3. Commendatore, Pasquale & Kubin, Ingrid & Mossay, Pascal & Sushko, Iryna, 2015. "Dynamic agglomeration patterns in a two-country new economic geography model with four regions," Chaos, Solitons & Fractals, Elsevier, vol. 79(C), pages 2-17.

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    More about this item

    Keywords

    industrial agglomeration; three-region NEG models; footloose entrepreneurs; wirtschaftliche Integration; Zollunion; Agglomeration ; Standortpolitik; neue ökonomische Geographie; Wirtschaftstheorie;
    All these keywords.

    JEL classification:

    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F2 - International Economics - - International Factor Movements and International Business
    • R12 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Size and Spatial Distributions of Regional Economic Activity; Interregional Trade (economic geography)

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