DP4326 | The Structure of Simple 'New Economic Geography' Models

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This paper shows that the mathematical structure of the most widely used New Economic Geography models is the same, irrespective of the underlying agglomeration mechanism assumed (factor migration, input-output linkages, endogenous capital accumulation). This enables us to provide analytical proofs to three important and related results in the field. First, standard models display at most two interior steady states beyond the symmetric one; we refer to the latter steady state as 'dispersion' because the manufacturing industry is evenly spread across locations. Second, when interior, asymmetric steady-states exist they are unstable. The final result of this paper relates to the corner steady states of the model whereby the manufacturing sector is clustered in a single location; we refer to such a steady states as 'agglomeration'. I establish that both agglomeration and dispersion are stable steady state for some economically meaningful parameter values of the model. This paper also stresses the empirical implications of the most important results derived in this study.