Geoscience Reference
In-Depth Information
A
Centripetal force
(Agglomeration)
Centrifugal force
(Spillovers)
B
C
Fig. 10.1
Regional agglomeration and spillovers
10.3
Theoretical Motivation
Literature review indicates that despite CGE analysis provides a comprehensive
way to assess impacts of transport with considerations of both the demand and the
supply of an economy, the spatial aspects are only considered under a multiregional
framework with a capacity to evaluate interregional flows. Issues such as the
reliability of exogenous parameters, spatial dependence among elasticity of substi-
tution have never been discussed or examined. As a result, these CGE models may
suffer from estimation bias due to the lack of awareness of spatial dependence in the
process of regional factor substitution.
In the view of the new economic geography, regional economic activities interact
under two types of forces: centripetal and centrifugal (Krugman
1991
). When the
centripetal force outweighs the centrifugal force, regional agglomeration occurs,
otherwise, regional spillovers dominate. Krugman also indicates the elasticity of
substitution has a close linkage to economies of scale, which indirectly determines
regional convergence or divergence. A higher elasticity of substitution implies
smaller economies of scale under general equilibrium conditions, which then works
against regional divergence. On the contrary, a lower elasticity of substitution implies
higher economies of scale which is more likely to cause regional divergence. The
elasticity of factor substitution matters both intraregionally and interregionally due to
the effects of both agglomeration and spillovers.
As illustrated in Fig.
10.1
, agglomeration and spillovers occur both intra-
regionally and interregionally. Depending on the levels of transportation cost,
changes of factor prices such as rental and wage rates may lead to the substitution
of factors happening within regions A, B and C respectively and/or among them.
As a result, unless the interregional elasticity of factor substitution equals zero, the
aggregate values of the elasticity of factor substitution should be different from the
value that is only driven by the two forces within each region.
