Edited by Bernard Fingleton
Chapter 3: Testing the ‘New Economic Geography’: A Comparative Analysis Based on EU Regional Data
Bernard Fingleton 3.1 INTRODUCTION Interest in economic geography has been stimulated by the introduction of a formal general equilibrium ‘new economic geography’ (NEG) theory in which increasing returns to scale are an outcome of each agent solving a clearly deﬁned economic problem within the context of a monopolistic competition market structure (Dixit and Stiglitz, 1977). Recents books, notably Fujita, Krugman and Venables (1999) and Brakman, Garretsen and van Marrewijk (2001), have helped to popularize these developments in geographical economics, and despite some cautious reactions (Neary, 2001), on the whole, NEG theorizing has been reasonably widely appreciated among the broader economics and regional science community, helping to establish at a formal level the role of increasing returns, which had long been seen as a key to understanding the spatial concentration of economic activity. Initially, theoretical developments were at the cutting edge of research activity, but more recently we have seen a growing literature aimed at operationalizing and testing NEG (see, for example, Combes and Lafourcade, 2001, 2004; Forslid, Haaland and Midelfart Knarvik, 2002; Combes and Overman, 2003; Head and Mayer, 2003; Rice and Venables, 2003; Redding and Venables, 2004). Among this literature is analysis relating to the so-called wage equation, which links nominal wages to market access or potential,1 and which was initially studied by Hanson (1997, 1998) and more latterly by Roos (2001), Brakman, Garretsen and Schramm (2002), Mion (2003) and Niebuhr (2004). The present chapter also follows this strand of analysis. This recent rigorous empirical work has...
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