Working Paper: CEPR ID: DP3004
Authors: Victor D. Norman; Anthony J. Venables
Abstract: This Paper studies the size and number of industrial clusters that will arise in a multi-country world in which, because of increasing returns to scale, one sector has a propensity to cluster. It compares the equilibrium with the world welfare maximum, showing that the equilibrium will generally have clusters that are too small, while there are possibly too many countries with a cluster. Allowing national governments to subsidize will move the equilibrium to the world welfare maximum, so there is no ?race to the bottom?. If subsidy rates were capped then there would be a proliferation of too many and too small clusters.
Keywords: clusters; increasing returns; industrial policy; trade
JEL Codes: F10; F12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increasing returns to scale (O40) | clustering of industries (R32) |
| national subsidies (H23) | size of clusters (C38) |
| subsidy regulation (H20) | cluster efficiency (C38) |
| market structure (D49) | welfare outcomes (I38) |