New Directions in Economic Geography

New Directions in Economic Geography

New Horizons in Regional Science series

Edited by Bernard Fingleton

This important book explores original and alternative directions for economic geography following the revolution precipitated by the advent of so-called ‘new economic geography’ (NEG). Whilst, to some extent, the volume could be regarded as part of the inevitable creative destruction of NEG theory, it does promote the continuing role of theoretical and empirical contributions within spatial economic analysis, in which the rationale of scientific analysis and economic logic maintain a central place. With contributions from leading experts in the field, the book presents a comprehensive analysis of the extent to which NEG theory is supported in the real world. By exploring whether NEG theory can be effectively applied to provide practical insights, the authors highlight novel approaches, emerging trends, and promising new lines of enquiry in the wake of advances made by NEG.

Chapter 2: Models of ‘New Economic Geography’: Factor Mobility vs. Vertical Linkages

Gianmarco I.P. Ottaviano

Subjects: economics and finance, regional economics, urban economics, geography, economic geography, urban and regional studies, regional economics, urban economics

Extract

Gianmarco I.P. Ottaviano 2.1 INTRODUCTION This chapter presents a theoretical contribution to the empirical testing of ‘new economic geography’ (henceforth, NEG) models.1 At the moment such testing is generally crippled by identification problems due to two types of observational equivalence. The first type concerns the comparison between the implications of NEG models and those of alternative models mainly based on technological externalities (‘between-equivalence’). The second type concerns the comparison between the implications of NEG models based on vertical linkages among firms and those on NEG models based on factor mobility (‘within-equivalence’). The focus of the chapter is on within-equivalence. Its meaning is described in Section 2.2 by comparing the two most popular simple NEG models due to Krugman (1991) and Krugman and Venables (1995). These models deal with labour mobility and input–output linkages respectively. The relevance of within-equivalence is usually not fully understood. A possible explanation is that models with vertical linkages are typically very difficult to deal with analytically. This has not only hampered the exploitation of their full analytical potential but has also concealed their observational equivalence with models based on factor mobility. For this reason, Section 2.2 compares the analytically solvable versions of Krugman (1991) and Krugman and Venables (1995) as proposed by Forslid and Ottaviano (2003) and Ottaviano and Robert-Nicoud (2005) respectively. Closed form solutions reveal the fundamental equivalence of the equilibrium and stability properties of the two types of models. These equivalence results raise doubts on the possibility of empirically testing the...

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