been modeled as a black box. Of course, there are many overlaps in recent research inspired by standard location theory and new economic geography, as can be seen for example in the Fujita and Thisse (2002) synthesis of these issues. The way I organize the present discussion is for analytical convenience only.

# **New Economic Geography and Public Policy**

There are many excellent textbooks and surveys covering the main results of the “new economic geography” and the purpose of this survey is by no mean to replicate these, but instead to highlight the main features of these models that are relevant to meaningfully discuss infrastructure issues.<sup>12</sup> The canonical new economic geography model has two regions, which may initially be symmetric in their endowments of the two factors of production (capital and labor), ruling out standard comparative advantages. There are two sectors of production, a traditional one (often alluded to as agriculture) producing a freely tradable good under constant returns to scale, and a modern (say, industrial) one characterized by imperfect competition and differentiated products. Finally, workers and capital may be characterized by different degrees of mobility between regions.<sup>13</sup> This literature further distinguish geographical aspects termed “first nature”, such as natural conditions of the soil, proximity to coasts or rivers, weather conditions, from “second nature” attributes resulting from the non random location of firms and workers across space. Its objective is therefore to explain how such patterns of agglomeration may arise, above and beyond first nature attributes of different locations, and how they may be affected by policy interventions such as subsidies to firms or human capital accumulation, and the accumulation of infrastructure capital among others.

The main feature of economic geography models is that they consider this second nature dimension of economic activity to be the result of the interplay between agglomeration and dispersion forces.<sup>14</sup> Technically, agglomeration forces arise as the result of increasing returns that may be either internal or external to the firms in the industrial sector.<sup>15</sup> Internal increasing returns may be due to backward, demand linkages, often called the “market access effect” or “home market effect”, that push firms to locate their activities in regions with bigger markets to be able to serve more consumers avoiding trade costs, or to forward, cost linkages that bid input prices down and again tend to attract firms to already crowded locations.

Agglomeration may also arise for reasons external to the firms, such as knowledge spillovers or labor market externalities linked to the greater availability and better training of workers, as already mentioned by Marshall in the 19<sup>th</sup> century.

> 12 See for example FKV (1999), Neary (2001), Baldwin et al. (2003), Ottaviano and Thisse (2004). Henderson, Shalizi and Venables (2001) discuss some of these issues specifically in a development perspective.

> 13 See Puga (2001) for a discussion of the differences between models with and without migration. Empirically, migration is lower in the EU that in the US, which justifies alternative assumptions. 14 Of course, different models display different combinations of (a subset of) these forces.

> 15 See Rosenthal and Strange (2004) for a recent survey on the empirical evidence on these agglomeration forces. Ellison, Glaeser and Kerr (2007) find evidence for all the mechanisms discussed here.

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