Chapter 3: Geographical Grids in ‘New Economic Geography’ Models
Dirk Stelder University of Groningen, The Netherlands 1. INTRODUCTION As Fujita (1999) has recently assessed it, the new economic geography (NEG) is still in the Wright brothers phase of learning how to ﬂy. Despite its honorary title, most if not all NEG literature so far deals with theoretical extensions of the basic model of Krugman (1991a) with empirical implementations hardly off the ground. The relevance of the current theoretical debate on model reﬁnements such as introducing congestion costs, multisector speciﬁcations, the housing market, population growth and so on is not questioned here. Instead, in this chapter it is argued that a major empirical shortcoming of most NEG models is their use of very abstract one-dimensional economic spaces like a circle or a horizontal line. Surprisingly, to my knowledge all new economic geographers so far have overlooked the ﬁrst and most obvious thing to do: apply the model in two-dimensional space. It is shown that if we do so, even the basic model can produce complex hierarchical city distributions that are less far from reality than we would expect from such a simple model. In Section 2 the basic model and its main problems are introduced for readers who are not familiar with the NEG literature. Section 3 discusses the way in which a two-dimensional economy can be introduced into the model. As an example it is shown what equilibria in a square grid of locations with simple Euclidean distances look like and how they react to a change...
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