Geography Reference
In-Depth Information
a pecuniary externality and a technological externality. In this way, i rms' proi ts depend
on the interplay of an indirect interaction mediated by the market, which corresponds to
a pecuniary externality, and a localized direct interaction, which corresponds to a tech-
nological externality. As it turns out, the former acts against the creation of production
clusters while, by assumption, the latter promotes them.
Inside this framework, we analyze an explicit i rms locational decision process. Our
aim is to characterize the long run geographical distribution emerging from this process
and relate it to the interplay of the two forms of externality. Since we explicitly intro-
duce the time dimension in our analysis, we are also able to address history dependent
phenomena. In particular, we are able to investigate how the initial state of the economy
af ects i rms' decisions and to show that, because of i rms' heterogeneity, when agglom-
eration occurs it is characterized by a transient nature.
This chapter is organized as follows. In section 2 we briel y describe the model and
its assumptions. In section 3 we study the static setting, and derive the geographical
distribution when the model is solved by assuming instantaneous equilibrium between
i rms choices. Starting from the previously identii ed equilibria, section 4 introduces both
heterogeneity in agents' decisions and an explicit dynamics across time, discussing what
kind of dif erences are observed with respect to the static case. Finally section 5 summa-
rizes our main i ndings and suggests some possible further developments.
2. The model
The following model is a simplii cation of that described in Bottazzi and Dindo (2008),
where more details can be found. Consider a two-location economy. In each location
there are
I
households.
1
Each household is a 'local' worker, that is, he supplies labor to
i rms located where he resides, and a 'global' consumer, that is, he can buy goods pro-
duced in both locations and traded in a global market. The economy has two sectors:
manufacturing and agriculture. In both sectors production is localized. The agricultural
good is homogeneous, whereas the manufacturing good is made by dif erentiated prod-
ucts. Location
l
=1, 2 has
n
l
manufacturing i rms and the total number of i rms is
n
1
+
n
2
=
N
. Without loss of generality, we assume that
N
is even. In order to consume manufac-
turing goods produced in the location where they do not reside, consumers have to pay
a transportation cost t [ (0, 1], which takes the form of an iceberg cost: for each unit
of good shipped, only a fraction t arrives at the destination. This is equivalent to saying
that consumers pay a price
p
/t for each unit of good they have to import. The higher the
value of t, the lower the cost of transporting the goods. Agricultural goods are traded at
no costs. Agents' consumption behavior is specii ed by the following
Assumption 1:
Each agent chooses among the agricultural good and the
N
dif erent
manufacturing products so as to maximize the following utility function:
U
5
C
12m
A
C
m
M
(24.1)
where the utility of bundle
C
M
is of constant elasticity of substitution (CES) type,
s21
s
s
(s21)
s . 1
C
M
5
a
a
i
51,
N
c
b
(24.2)
i
