2024/01/18 by Kubin, Ingrid, Commendatore, Pasquale, Petraglia, Carmelo +1
paper · doi:10.57938/6a3dea13-cd32-4f16-8587-7994ad619710
New Economic Geography (NEG) models do not typically account for the <br/>presence of regions other than the ones involved in the integration process. We explore such a <br/>possibility in a Footloose Entrepreneur (FE) model aiming at studying the stability properties <br/>of long-run industrial location equilibria. We consider a world economy composed by a customs <br/>union of two regions (regions 1 and 2) and an "outside region" which can be regarded as <br/>the rest of the world (region 3). The effects of economic integration on industrial agglomeration <br/>within the customs union are studied under the assumption of a constant distance between <br/>the customs union itself and the third region. The results show that higher economic integration <br/>does not always implies the standard result of full agglomeration of FE models. This incomplete <br/>agglomeration outcome is due to the fact that the periphery region keeps a share of <br/>industrial activities in order to satisfy a share of "external demand". That is, the deindustrialization <br/>process brought about by economic integration in the periphery of the union is mitigated <br/>by the demand of consumers living in the rest of the world. In general, the market size of <br/>the third region affects the number of the long-run equilibria, as well as their stability properties. <br/>In addition to the standard outcomes of FE models, we describe the existence of two <br/>asymmetric equilibria characterised by unequal distribution of firms between regions 1 and 2, <br/>with no full agglomeration though. Interestingly, these equilibria are stable and therefore can <br/>be regarded as a likely long-run equilibrium state of the economy.