Working Paper: CEPR ID: DP3960
Authors: Richard Baldwin; Philippe Martin
Abstract: We review the theoretical links between growth and agglomeration. Growth, in the form of innovation, can be at the origin of catastrophic spatial agglomeration in a cumulative process à la Myrdal. One of the surprising features of the Krugman (1991) model, was that the introduction of partial labour mobility in a standard ?new trade model? with trade costs could lead to catastrophic agglomeration. The growth analog to this result is that the introduction of endogenous growth in the same type of ?new trade model? can lead to the same result. A difference with the labour mobility version is that the results are easier to derive from the analytical point of view in the endogenous growth version. We show that the relation between growth and agglomeration depends crucially on capital mobility between regions. The absence of capital mobility is at the heart of the possibility of spatial agglomeration with catastrophe. In addition, growth alters the process of location even without catastrophe. In particular, and contrary to the fundamentally static models of the New Economic Geography, spatial concentration of economic activities may be consistent with a process of delocation of firms towards poor regions. Finally, the presence of localized technology spillovers implies that spatial agglomeration is conducive to growth.
Keywords: agglomeration; capital mobility; geography; growth
JEL Codes: O40; R10
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| spatial agglomeration (R32) | increased economic growth (O49) |
| capital mobility (F20) | stabilization of location equilibrium (C62) |
| absence of capital mobility (F21) | catastrophic agglomeration (R11) |
| localized technology spillovers (R32) | increased productivity (O49) |
| capital accumulation in one region (R11) | further capital accumulation (E22) |
| increased spatial concentration of firms (R32) | enhanced rate of innovation (O36) |
| localized technology spillovers (R32) | positive feedback loop between growth and agglomeration (R11) |