May 27, 2005

New economic geography, empirics, and regional policy

Agglomeratievoordelen dwarsbomen spreiding van economische activiteit

Press release

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We validate one explanation: agglomeration advantages lock business activity in relatively prosperous core regions, even though wages – and thus production costs – tend to be higher there.

We set off from the ‘New Economic Geography’, a set of general equilibrium models that focus on location choice. Theory, descriptive statistics, and econometric analysis support the conclusion that the European economic geography is characterized by a network of local and stable core periphery systems. This implies that disparities between core regions and their peripheries at a (sub) provincial level of regional aggregation are with us to stay, as regional policy targeted on peripheries tends to be insufficient to counter centripetal market forces. Moreover, even if such policy has an impact, it may be adverse, as core regions may benefit disproportionately in the long run. A focus of regional policy on local agglomerations, which have a realistic chance to hold on to economic activity, is therefore desirable.