Essays in New Economic Geography

The recent Nobel Prize assigned to Paul Krugman "for his analysis of trade patterns and location of economic activity" witnesses the important role that the scienti�c community gives to the insights of the so-called New Economic Geography (NEG) literature. This field of economic analysis has always been particularly appealing to policy makers, given the direct link between its results and regional policy rules. For the same reason it is useful to deepen the analysis of its most important outputs by testing the theoretical robustness of some of its more relevant statements. This thesis tries to o¤er a contribution in this direction by focusing on a particular sub-field of NEG literature, the so-called New Economic Geography and Growth (NEGG) literature, having in Baldwin and Martin (2004) and Baldwin et. al (2004) the most important theoretical syntheses. These two surveys collect and present in an uni�ed framework the works by Baldwin, Martin and Ottaviano (2001), where capital is immobile and spillovers are localized, Martin and Ottaviano (1999) where spillovers are global and capital is mobile. Other related papers are Baldwin (1999) which introduces forward looking expectations in the so-called Footloose capital model developed by Martin and Rogers (1995); Baldwin and Forslid (1999) which introduces endogenous growth by means of a q-theory approach; Baldwin and Forslid (2000) where spillovers are localized, capital is immobile and migration is allowed. Some more recent developments in the NEGG literature can be distinguished in two main strands. One takes into consideration factor price differences in order to discuss the possibility of a monotonic relation between agglomeration and integration (Bellone and Maupertuis (2003) and Andres (2007)). The other one assumes firms heterogeneity in productivity (first introduced by Eaton and Kortum (2002) and Melitz (2003)) in order to analyse the relationship between growth and the spatial selection e¤ect leading the most productive firms to move to larger markets (see Baldwin and Okubo (2006) and Baldwin and Robert-Nicoud (2008). These recent developments are related to our work in introducing some relevant departures from the standard model. Indeed this thesis develops and extends the theoretical framework of New Economic Geography theory along several routes. In the third chapter of the thesis we develop a New Economic Geography and Growth model which, by using a CES utility function in the second-stage optimization problem, allows for expenditure shares in industrial goods to be endogenously determined. The implications of our generalization are quite rel-evant. In particular, we obtain the following novel results: 1) catastrophic agglomeration may always take place, whatever the degree of market integration, provided that the traditional and the industrial goods are su¢ ciently good substitutes; 2) the regional rate of growth is affected by the interregional allocation of economic activities even in the absence of localized spillovers, so that geography always matters for growth and 3) the regional rate of growth is af- fected by the degree of market openness: in particular, depending on whether the traditional and the industrial goods are good or poor substitutes, economic integration may be respectively growth-enhancing or growth-detrimental. In the fourth chapter of the thesis we build a New Economic Geography and Growth model based on Baldwin, Martin and Ottaviano (2001) with an additional sector producing Non-tradable goods (services). By assuming intersectoral and localized knowledge spillovers from the innovation sector to the service sector, we show that firms'allocation affects regional real growth. More precisely we assume that the unit labour requirements (and thereby the prices) in the service production are a negative function of the output of innovation, i.e. the stock of knowledge capital. Due to this new specification, real growth rates in the two regions always diverge when the firms allocation pattern differs from the symmetric one. This result is a novelty in the standard theoretical NEGG literature where regional gap in real growth rate is always zero. Moreover, this result has strong policy implications because it suggests that concentrating in- dustries in only one region may also bring a dynamic loss for the periphery. By analyzing the trade-o¤ between the dynamic gains of agglomeration (due to localized intertemporal spillovers) and the dynamic loss of agglomeration (due to localized intersectoral spillovers), we also discuss different notions of optimal level of agglomeration. The thesis will proceed as follows: in the chapters one and two we describe the state of the art in New Economic Geography and its further developments such as the New Economic Geography and Growth, the possibility of a monotonic relation between agglomeration and integration, and finally the firms heterogeneity in New Economic Geography models. Instead in chapters three and four we present our original contribution to the theory, i.e. the analysis of endogenous expenditure shares and intersectoral knowledge spillovers on the agglomeration patterns and economic growth.