Adding geography to the new economic geography : bridging the gap between theory and empirics

For reasons of analytical tractability, new economic geography (NEG) models treat geography in a very simple way: attention is either confined to a simple 2-region or to an equidistant multi-region world. As a result, the main predictions regarding the impact of e.g. diminishing trade costs are based on these simple models. When doing empirical or policy work these simplifying assumptions become problematic and it may very well be that the conclusions from the simple models do not carry over to the heterogeneous geographical setting faced by the empirical researcher or policy maker. This paper tries to fill this gap by adding more realistic geography structures to the Puga (1999) model that encompasses several benchmark NEG models. By using extensive simulations we show that many, although not all, conclusions from the simple models do carry over to our multi-region setting with more realistic geography structures. Given these results, we then simulate the impact of increased EU integration on the spatial distribution of regional economic activity for a sample of 194-NUTSII regions and find that further integration will most likely be accompanied by higher levels of agglomeration.

[1]  P. Krugman,et al.  The new economic geography: Past, present and the future , 2003 .

[2]  Ludger Woessmann,et al.  Fundamental Determinants of School Efficiency and Equity: German States as a Microcosm for OECD Countries , 2007, SSRN Electronic Journal.

[3]  A. Venables,et al.  The Spatial Economy: Cities, Regions, and International Trade , 1999 .

[4]  S. Brakman,et al.  New economic geography: Closing the gap between theory and empirics , 2006 .

[5]  Ondrej Schneider,et al.  The EU Budget Dispute - A Blessing in Disguise? , 2007 .

[6]  J. Gorter,et al.  New economic geography, empirics, and regional policy , 2005 .

[7]  G. Schnabl.  Exchange Rate Volatility and Growth in Emerging Europe and East Asia , 2007, SSRN Electronic Journal.

[8]  K. Head,et al.  The Puzzling Persistence of the Distance Effect on Bilateral Trade , 2004 .

[9]  F. Schneider,et al.  Monetary Commitment, Institutional Constraints and Inflation: Empirical Evidence for OECD Countries Since the 1970s , 2007, SSRN Electronic Journal.

[10]  C. Cannings,et al.  Evolutionary Game Theory , 2010 .

[11]  D. Puga,et al.  European Regional Policies in Light of Recent Location Theories , 2001 .

[12]  J. Lawarree,et al.  Bribery versus extortion: allowing the lesser of two evils , 2010 .

[13]  Jörgen W. Weibull,et al.  Evolutionary Game Theory , 1996 .

[14]  P. Krugman,et al.  Trade Policy and the Third World Metropolis , 1992 .

[15]  J. Bröcker.  How would an EU-membership of the Visegrád- countries affect Europe‘s economic geography?EU-membership of the Visegrád-countries , 1998 .

[16]  D. Puga.  The Rise and Fall of Regional Inequalities , 1997 .

[17]  Thijs Knaap,et al.  Trade, location, and wages in the United States , 2006 .

[18]  H. Garretsen,et al.  Trade Costs, Market Access and Economic Geography: Why the Empirical Specification of Trade Costs Matters , 2007, SSRN Electronic Journal.

[19]  Rikard Forslid,et al.  A U-shaped Europe?: A simulation study of industrial location , 2002 .

[20]  Masahisa Fujita,et al.  Frontiers of the New Economic Geography , 2005 .

[21]  Anthony J. Venables,et al.  Preferential trading arrangements and industrial location , 1997 .

[22]  P. Krugman,et al.  The Spatial Economy , 1999 .

[23]  Gordon H. Hanson.  Market Potential, Increasing Returns, and Geographic Concentration , 1998 .

[24]  Carlos Alós-Ferrer,et al.  On the Evolution of Market Institutions: The Platform Design Paradox , 2006 .

[25]  Jukka Pirttila,et al.  A ‘Leaky Bucket’ in the Real World: Estimating Inequality Aversion Using Survey Data , 2007 .

[26]  Robert S. Chirinko,et al.  The Fisher/Cobb-Douglas Paradox, Factor Shares, and Cointegration , 2007 .

[27]  Tomoya Mori,et al.  On the evolution of hierarchical urban systems1 , 1999 .

[28]  M. Obstfeld,et al.  Regional non-adjustment and fiscal policy , 1998 .

[29]  Masahisa Fujita,et al.  The role of ports in the making of major cities: Self-agglomeration and hub-effect , 1996 .

[30]  Henrik Jordahl,et al.  The Looks of a Winner: Beauty, Gender and Electoral Success , 2006, SSRN Electronic Journal.

[31]  Anthony J. Venables,et al.  Economic Geography and International Inequality , 2001 .

[32]  Jacques-François Thisse,et al.  Regional economics: A new economic geography perspective , 2007 .

[33]  Elhanan Helpman,et al.  The Size of Regions , 1995 .

[34]  D. Stelder.  Where Do Cities Form? A Geographical Agglomeration Model for Europe , 2005 .

[35]  S. Brakman,et al.  The New Introduction to Geographical Economics: Dynamics, growth, and geography , 2009 .

[36]  Marc Schramm,et al.  Putting New Economic Geography to the Test: Free-Ness of Trade and Agglomeration in the EU Regions , 2005, SSRN Electronic Journal.

[37]  Lars P. Feld,et al.  Strategic Tax Collection and Fiscal Decentralization: The Case of Russia , 2013 .

[38]  Christopher S. Fowler.  Taking geographical economics out of equilibrium: implications for theory and policy , 2007 .

[39]  Takatoshi Tabuchi,et al.  Changes in Transport and Non Transport Costs: Local vs. Global Impacts in a Spatial Network , 2007 .

[40]  Franz C. Palm,et al.  The Behavior of the Maximum Likelihood Estimator of Dynamic Panel Data Sample Selection Models , 2007 .

[41]  Bernardina Algieri,et al.  Patterns of Current Account Adjustment—Insights from Past Experience , 2007, SSRN Electronic Journal.

[42]  Anthony J. Venables,et al.  Equilibrium Locations of Vertically Linked Industries , 1996 .

[43]  Marcelo Resende,et al.  Hierarchical Structure in Brazilian Industrial Firms: An Econometric Study , 2007 .

[44]  E. Sadka,et al.  Incorporating Affirmative Action into the Welfare State , 2007, SSRN Electronic Journal.

[45]  Holger Breinlich.  The spatial income structure in the European Union—what role for Economic Geography? , 2006 .

[46]  S. Brakman,et al.  Adding Geography to the New Economic Geography , 2007, SSRN Electronic Journal.

[47]  David Hummels,et al.  Toward a Geography of Trade Costs , 1999, GTAP Working Paper.

[48]  G. Ottaviano,et al.  Of hype and hyperbolas: introducing the new economic geography , 2001 .

[49]  Frank Bickenbach,et al.  Disproportionality Measures of Concentration, Specialization, and Localization , 2008 .

[50]  H. Verbon.  Migrating Football Players, Transfer Fees and Migration Controls , 2007, SSRN Electronic Journal.

[51]  J. Amegashie,et al.  Moral Hazard and the Composition of Transfers: Theory With an Application to Foreign Aid , 2007 .

[52]  P. Krugman,et al.  First Nature, Second Nature, and Metropolitan Location , 1991 .

[53]  A. Venables,et al.  Globalization and the Inequality of Nations , 1995 .

[54]  T. Mayer,et al.  The Empirics of Agglomeration and Trade , 2003 .

[55]  Cheng Hsiao,et al.  Diagnostic Tests of Cross Section Independence for Nonlinear Panel Data Models , 2007 .

[56]  Paul Krugman,et al.  WHAT'S NEW ABOUT THE NEW ECONOMIC GEOGRAPHY? , 1998 .

[57]  Rikard Forslid,et al.  Economic Geography and Public Policy , 2011 .

[58]  Jacques-François Thisse,et al.  New Economic Geography: An appraisal on the occasion of Paul Krugman's 2008 Nobel Prize in Economic Sciences☆ , 2009 .

[59]  J. Haaland,et al.  Integration and Transition: Scenarios for the Location of Production and Trade in Europe , 2002 .

[60]  Rosella Nicolini,et al.  Regional Convergence and International Integration , 2000 .

[61]  Jacques-François Thisse,et al.  The Economics of Agglomeration , 1996, Oxford Research Encyclopedia of Economics and Finance.

[62]  F. Schneider,et al.  Size and Development of the Shadow Economy and of Do-it-Yourself Activities in Germany , 2007, SSRN Electronic Journal.

[63]  M. Crozet.  Do migrants follow market potentials? An estimation of a new economic geography model , 2004 .

[64]  Assaf Razin,et al.  The Role of Immigration in Sustaining the Social Security System: A Political Economy Approach , 2007, SSRN Electronic Journal.

[65]  Jacques-François Thisse,et al.  Regional Specialization, Urban Hierarchy, and Commuting Costs , 2006 .

[66]  Horst Rottmann,et al.  Effects of Innovation on Employment: A Dynamic Panel Analysis , 2007, SSRN Electronic Journal.

[67]  Frédéric Robert-Nicoud,et al.  The Structure of Simple 'New Economic Geography' Models , 2004, Journal of Economic Geography.

[68]  Rainald Borck,et al.  Commuting Subsidies With Two Transport Modes , 2007, SSRN Electronic Journal.