Increasing Returns and Economic GeographyThis paper develops a two-region, two-sector general equilibriun model of location. The location of agricultural production is fixed, but ionopolistcally competitive manufacturing finns choose their location to maximize profits. If transportation costs are high, returns to scale weak, and the share of spending on manufactured goods low, the incentive to produce close to the market leads to an equal division of manufacturing between the regions. With lower transport costs, stronger scale economies, or a higher manufacturing share, circular causation sets in: the more manufacturing is located in one region, the larger that region's share of demand, and this provides an incentive to locate still more manufacturing there. Thus when the parameters of the economy lie even slightly on one side of a critical "phase boundary", all manufacturing production ends up concentrated in only one region |
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agricultural assumed assumption Author Title Date behavior Bureau of Economic central place converge or diverge defecting firm develop a simple economic geography Economic Research economies of scale economy that lies elasticity external economies featureless plain Figure firm in region firm's fraction Hans-Werner Sinn high transportation costs higher strata home market effect imperfect competition income of region INCREASING RETURNS International Joel Slemrod larger market lattice location theory long-run equilibrium low transport cost manufactures aggregate manufacturing production marginal cost Massachusetts Avenue monopolistic competition National Bureau NBER Number Author Title number of manufacturing number of workers numeraire P₁ paper parameter values Paul Krugman peasants pecuniary externalities phase boundary Poterba production in region real wages regional convergence regional divergence relative RETURNS AND ECONOMIC role SAN DIEGO second stratum sector share of expenditure short-run equilibrium six regions small country Stiglitz Tax Reform UNIVERSITY OF CALIFORNIA value of sales w₁/w₂ wage rate Y₁