Beiträge zur Jahrestagung des Vereins für Socialpolitik 2014: Evidenzbasierte Wirtschaftspolitik - Session: Integration, Financial Frictions, and Economic Growth No. E18-V3
This paper analyzes within a two-region endogenous growth model how different types of public policies affect the equilibrium spatial distribution of economic activity. Integration is modeled as a continuum and enables firms to access the public input of the respective other region. Given a dominance of agglomeration forces, multiple equilibria arise at which spreading becomes unstable and the stable equilibrium is characterized by a core-periphery structure. If only partial coordination of the two goverments decisions is realized, the positive productivity impact of one region s public input on the other region s marginal capital return becomes a positive externality. Then, the concentration of public inputs may end up to be suboptimally high or low, depending on the degree of scale effects. We perform numerical simulations to derive the equilibrium capital distribution and to disentangle the impact of the various determinants on equilibrium agglomeration.