PowerPoint-presentatie

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Modeling the spatial pattern of economic
activities in the New Economic Geography I
Mark Thissen
Lecture 1 9.00 - 11.00 July 4, 2007 Dimetic
workshop Pécs, Hungary
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Contents

• Introduction to the New Economic Geography
• Agglomeration economies Policy relevance
• A NEG application RAEM a Spatial Applied General
  Equilibrium model
• The size of agglomeration effects
• Policy implications

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NEG and Economies of Agglomeration Literature
Overview Baldwin, R., Forslid, R., Martin, P.,
Ottaviano, G., and Robert-Nicoud, F. (2003),
Economic Geography and Public Policy, Princeton
University Press, Princeton, New Jersey. Fujita,
M., and Thisse J.F. (2002), Economics of
Agglomeration Cities, Industrial Location and
Regional Growth, Cambridge University Press,
Cambridge. Krugman, P. (1980,1991), Several
Articles. Labour market Pissarides, C.A.
(2000), Equilibrium Unemployment Theory, MIT
Press, Cambridge Massachussetts. Applied Spatial
CGE and Monopolistic competition Venables, A.J.
and M.Gasiorek, 1996, Evaluating Regional
Infrastructure A Computable Equilibrium
Approach, Mimeo, London School of Economics,
UK Venables, A. (1996), Equilibrium Locations of
Vertically Linked Industries, International
Economic Review 37, pp. 341-359.
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NEG Stylized facts

• Agglomerations citys and size differences
• Income and productivity differences among
  regions
• Trade comparable products (intra-sector trade)
• - Yellow and green pencils

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Space and perfect competition The spatial
impossibility theorem

• Homogeneous space
• No trade because of transport costs
• No cities because of land prices
• Back-yard capitalism
• Solutions
• Homogeneous space and indivisibilities
• No equilibrium possible (people move or firms
  move)
• Heterogeneous space
• The rise and decline of cities (explanation and
  why not more often? no path dependency)
• Are spatial differences large enough
• Intra-sector trade

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NEG Imperfect competition and economies of scale

• Love of Variety
• Demand for slightly different (unique) products
• Consequence Economies of scale and market power
• Monopolistic competition
• Many different firms and products
• Endogenous number of firms

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NEG Why Cities and Agglomerations

• Agglomeration effects Locate close to large
  market
• Market-access firms minimize transport costs
• Variety effect benefit of many varieties
• Cost of living effect consumers minimize
  transport costs
• Dispersion effects Locate far away from large
  market
• Market-crowding firms try to escape competition
• Housing costs consumers search for low housing
  prices
• Congestion communication and transaction costs

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NEG, Economics in Space and Time
Infrastructure investment Transport innovations
Industrial investment
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Infrastructure and NEG An Example
Congestion Versus Space
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The Firm and Agglomeration effects
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The Firm Increasing city size
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The Firm A new road
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Agglomeration economies Spatial Dynamics over
time.

• Urbanisation and agglomeration
• In the presence of agglomeration effects there
  are large gains to be made by increasing
  agglomeration size.
• There is place for different size of
  agglomerations at different locations (not only
  one big agglomeration).
• Multiple solutions and path dependency.
• However First Welfare Theorem is no longer valid
• External effects of our behaviour are not taken
  into account in our decisions. These effects may
  be negative or positive.
• Negative outcomes if there are agglomeration
  forces driving migration with strong congestion
  effects.
• The dynamics of the path determine the outcomes
  via path dependency.
• Other markets?

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Agglomeration economies Policy relevance

• First Welfare Theorem
• We Need a Government!
• Spatial Planning
• Housing and city size construction for the
  unemployed
• Value of open space and the environment
• Social Policy
• Supporting the perifery Poor scientists and Rich
  cleaning ladies?
• Infrastructure
• Making Agglomerations

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Infrastructure Roads to development?

• How large are agglomeration economies in the
  Netherlands?
• - Benefits of infrastructure projects only based
  on demand curve?
• How does accessibility affect economies of
  agglomeration?
• - Should we open up the periphery?
• Where are the largest benefits from agglomeration
  economies?
• - Which road improvements give us the largest
  additional benefits

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NEG RAEM A Regional Applied Equilibrium Model
for the Netherlands
Imperfect competition

• Production Cobb Douglas
• Intermediate Varieties
• Consumption Varieties
• Market Monopolistic competition
• Transport Separate sector
• (no iceberg costs)
• Labour Search behavior

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Indirect effects Internalized External Effects
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The Empirical Research RAEM

• Estimate Direct Effect by use of transport
  demand function
• Direct effect Benefit to all users of roads
• Equals perfect competition outcome
• Regions
• Region connectivity (40 simulations)
• Between regions (1600 simulations)
• Estimate Total Effect with RAEM model
• NEG and Labour market imperfections
• results
• Multiplier total effect divided by direct
  effect

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Multiplier total effect divided by direct effect

• indicator for
• the size of the agglomeration effect
• All multipliers would be equal to 1 in the
  absence of agglomeration effects and imperfect
  markets
• The return on infrastructure investment
• Investments in infrastructure in the Netherlands
  are based on so-called direct effects. Marginal
  direct effects are expected to be equal in
  equilibrium and proportional to the costs of
  Infrastructure

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Results Regional Analysis (Commuting)

• Strong agglomeration economies in Randstad
• Amsterdam
• Rotterdam
• Utrecht

• Negative effects
• Pushing labour out of agglomeration

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Amsterdam versus Zaanstreek

• The Zaanstreek Labor market
• Difference in Out- and In-commuting
• Total effect lower (double counting internal
  commuting)

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Results Inter-Regional Analysis (Commuting)

• Agglomeration economies in Regions
• Shift of Jobs
• Identify agglomerations
• Definition (National)
• Inflows are important
• No Rotterdam

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Inter-Regional Analysis (Commuting Trade)

• Longer distances important
• Regional specialization and economies of
  agglomeration
• Intra-regional connection less important
• Relations to the east more important
• Agglomeration larger
• Randstad

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Main Roads

• Commuting

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Conclusions

• Agglomeration economies are important in the
  Netherlands, with Amsterdam the Core
  agglomeration.
• Short distances within cities are more important
  for commuting than longer distances
• Spatial Shift of jobs
• Long distances are more important for trade in
  goods
• Specialization and Agglomeration
• Underestimation of benefits
• Multipliers on important roads between 1.25 and
  1.75
• Overestimation of benefits
• Mutlipliers on non-important roads between 0.25
  and 0.75

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Questions on NEG and emperics

• Migration and agglomeration effects. Are
  congestion effects taking over? What about the
  first welfare theorem? In other words are the
  benefits of the migrant still larger then the
  disbenefits of the people in the agglomeration.
• Regional distribution and Governance. Do we get
  rich people and poor regions or vice versa?
• Agglomeration effects are due to what? We need
  more theory and more empirics!
• Knowledge spillovers?
• Linkages?
• Labour market?