Iogional Iolicy, Inlogialion ano lho Localion of Inousliy in a

Mulliiogion Fiamowoik
HIkard ForsIId

Januaiy 2004
ALstract
1his papoi analysos lho inloiaclion of oconomic inlogialion ano somo lypical iogional
policios in a now oconomic googiaphy moool wilh lhioo iogions of oiloionl sizo. 1ho poli-
cios analysoo aio lho iolocalion of govoinmonl aclivilios, infiasliucluio invoslmonls ano
suLsioios lo lho oslaLlishmonl of inousliy. Il is shown how iogional policy can oasily Lo
misoiiocloo. 1ho oxisling liloialuio focus almosl onliioly on lwo iogion casos. 1his papoi
insloao analyso analylically a lhioo iogion caso wilh asymmoliic iogions. 1ho inlioouclion
of a lhiio iogion givos sovoial now insighls. In pailiculai lho localional consoquoncos foi lho
iogion of inloimooialo sizo can nol Lo infoiioo fiom lho lwo iogion caso.
J11 |n.]n.n: F12, F1, F21, I12
1j&:J: agglomoialion, now oconomic googiaphy, mulliiogion-moool, iogional policy
1 IntroductIon
Many counliios oovolo a laigo pail of lhoii nalional Luogol lo iogional policy. 1hoso policios
aim al impioving lho oconomic conoilions in iogions whoio, foi somo ioason, conoilions aio
suLslanlially Lolow lho avoiago of olhoi iogions in lho counliy. In lho lypical caso, lho iocoiving
iogions aio loss oonsoly populaloo poiiphoial iogions wilh an oiooing inousliial Laso. Lxamplos
aio aLunoanl: Soulhoin Ilaly (lho so calloo "mozzogioino" iogion) iocoivos laigo liansfois fiom
lho highly inousliialisoo noilhoin Ilaly ano, al lho olhoi ono of Luiopo, noilhoin Noiway is
laigoly suppoiloo fiom lho soulhoin inousliial aioa. Iogional policy is also piovalonl on a
supianalional lovol. Foi inslanco, a consiooiaLlo pail of lho LU Luogol is oovoloo lo iogional
policy; 87 poiconl of lho LU Luogol foi lho yoai 2000 woio allocaloo lo sliucluialcohosion

Slockholm Univoisily ano CLII; omail: if^no.su.so.

1ho aulhoi lhanks Jamos Maikuson, Mallhow Slaughloi ano Foooiico 1iionfolli foi commonls ano suggos-
lions, as woll as pailicipanls al woikshop in Cians Monlana, ano lho NLLI summoi inslilulo 2008. Iomaining
oiiois aio my own. Financial suppoil fiom 1ho Lank of Swooon 1oiconlonaiy Founoalion (Dni J2001-0684:1) is
gialofully acknowloogoo.
1
funos wilh lho oLjoclivo of iooucing iogional imLalancos ano piomoling iogional oovolopmonl;
anolhoi 47/ woio allocaloo lo lho CAI (common agiiculluial policy) which, Ly oolnilion, is
sliongly Liasoo in favoui of iuial iogions.
Ono oxplicil aigumonl foi iogional policy in Luiopo ano olsowhoio is lhal lho policy ovons
oul lho gains fiom incioasoo oconomic inlogialion, ano iooucos lho iisk of somo iogions onoing
up losing fiom lho inlogialion piocoss. Howovoi, oala inoicalo a limiloo succoss in lhis iospocl.
Mioolfail-Knaivik ano Ovoiman (2002) lno lhal lho ovoiall manufacluiing aclivily in lho LU
has a faiily conslanl oisliiLulion al lho nalional lovol Lolwoon 1080 ano 100, whilo inousliy
is Locoming moio conconlialoo al lho iogional lovol. Similaily, GDI poi capila has Loon
convoiging slighlly Lolwoon counliios sinco lho mio 1080s, whoioas incomos aio oivoiging al lho
iogional lovol as illuslialoo Ly ComLos ano Ovoiman (2008).
1his papoi usos a simplo, analylically solvaLlo, mulli-iogion now oconomic googiaphy moool
lo analyso lho inloiaclion of oconomic inlogialion ano somo lypical iogional policios in a lhioo
iogion caso, whoio iogions aio of oiloionl sizo. Iogional policios aio consiooioo lo Lo oxogonous,
ano wo analyso lhioo lypos of policios: iolocalion of govoinmonl aclivilios lo poiiphoial iogions,
infiasliucluio invoslmonls ano suLsioios lo lho oslaLlishmonl of inousliy. 1ho oxisling liloialuio
focus almosl onliioly on lwo iogion casos in oiooi lo mako lho analysis analylically liaclaLlo.
1his papoi insloao analyso analylically a lhioo iogion caso wilh asymmoliic iogions. 1his is
possiLlo Locauso a pailiculaily simplo voision of now oconomic googiaphy moool, lho foollooso
capilal (FC) moool Ly Mailin ano Iogois (100), is usoo. 1ho inlioouclion of a lhiio iogion
givos sovoial now insighls. In pailiculai, in oui iogional policy oxpoiimonls, lho localional
consoquoncos foi lho iogion of inloimooialo sizo can nol Lo infoiioo fiom lho lwo iogion caso.
1his also moans lhal ompiiical spocilcalions Lasoo on lho lwo iogion caso, in piinciplo, aio
misspociloo.
Mailin ano Iogois (100) analyso lho impacl of puLlic infiasliucluio on inousliial localion
in a lwo counliy FC-moool. 1hoy lno lhal oomoslic infiasliucluio invoslmonls in a pooi
iogion oiaw inousliy lo lhal iogion, whoioas invoslmonls in inloinalional infiasliucluio havo
lho opposilo olocl. A similai analysis, incluoing giowlh olocls, is founo in Lalowin ol. al.
(2008). 1ho soclion on infiasliucluio policy in lhis papoi yiolos iolaloo iosulls, ovon lhough
lho analysis is conoucloo in an asymmoliic lhioo-counliy solling wilh inloinalional liaoo cosls.
Iuga ano VonaLlos(1007) simulalo numoiically lho olocls of piofoionlial liaoo agioomonls
as woll as huL ano spoko aiiangomonls in a voision of lho Kiugman VonaLlos (100) moool wilh
lhioo iogions of symmoliic sizo. A similai analysis is conoucloo in Lalowin ol. al. (2008) using
an analylically solvaLlo lhioo iogion FC-moool. 1ho infiasliucluio invoslmonl oxpoiimonl in
oui papoi is in pailiculai iolaloo lo lho analysis in Lalowin ol. al. (2008).
Finally, Duponl ano Mailin (2008) analyso iogional suLsioios ano lhoii wolfaio olocls using
a similai moool, Lul in a lwo iogion solling.
1ho papoi is oiganisoo as follows: Soclion 2 oovolops lho moool ano soclion 8 analysos lho
olocl of oconomic inlogialion on lho long iun oquiliLiium localion of inousliy. 1ho inloiaclion
2
of oconomic inlogialion ano iogional policios aio analysoo in soclion 4, ano lnally soclion
concluoos.
2 TLe AodeI
1his papoi usos a mulli-counliy voision of lho FC-moool Ly Mailin ano Iogois (100) ano
Lalowin ol. al. (2008). 1ho moool is consiooiaLly simploi lhan lho sominal now oconomic
googiaphy moools Ly Kiugman (1001), VonaLlos (1006) ano Kiugman ano VonaLlos (100),
which show how lho manufacluiing socloi, which consisls of lims piooucing oiloionlialoo
piooucls unooi incioasing ioluins lo scalo, may agglomoialo in ono iogion whon liaoo cosls aio
low. Agglomoialion of lho manufacluiing socloi is lho iosull of oomano ano supply linkagos.
Wilh lho ChamLoilinian laigo gioup assumplion lims sol piico as a conslanl maik-up on
maiginal cosl, which in luin implios lhal opoialion pioll is a conslanl fiaclion of nominal salos.
Supposo now lhal lhoio aio lwo maikols of oiloionl sizo sopaialoo Ly liaoo cosls. Fiims cloaily
piofoi, :. n:.h&, lo localo in lho laigo maikol lo minimiso liaoo cosls ano maximiso salos
ano opoialing piolls. Consoquonlly lhoio will Lo a ::.nn||j laigoi oquiliLiium shaio of
manufacluiing lims in a laigo maikol. 1his is lho `homo-maikol` olocl ioonliloo Ly Kiugman
(1080) ano Holpman ano Kiugman (108). ComLining lhis olocl wilh oxponoiluio shifling
cioalos a ciiculai causalily lhal can pioouco agglomoialion. 1his is achiovoo in Kiugman
(1001) Ly having laLoui moving wilh lims, ano in Kiugman ano VonaLlos (100) ano VonaLlos
(1006) Ly assuming lhal lims Luy gooos fiom oach olhoi as inloimooialo inpuls. 1ho homo
maikol olocl ano oxponoiluio shifling aio logolhoi namoo lho oomano link in lho now oconomic
googiaphy liloialuio. 1ho socono agglomoialion foico is calloo lho supply link. Il sloms fiom lho
facl lhal a iogion wilh many lims has a lowoi piico inoox wilh CLS piofoioncos. 1ho oomano-
ano supply-link imply posilivo foooLacks cioaling possiLililios of voiy non-linoai oynamics.
1ho moool in lhis papoi is similai in sliucluio lo lho coio-poiiphoiy moool. Howovoi, lho
moLilo facloi is physical capilal ialhoi lhan laLoui, ano lho ioluins lo capilal is iopaliialoo
lo immoLilo ownois. 1his implios lhal lho supply link is aLsonl sinco physical capilal movo
accoioing lo nominal ioluins, ano is lhoiofoio unalocloo Ly lho piico inoox. Socono, lhoio is
no oxponoiluio shifling sinco lho ioluin lo capilal is iopaliialoo. 1his implios lhal lhoio is
no ciiculai causalily, which in luin makos lho oynamics much simploi. In pailiculai, slailing
fiom a symmoliic oquiliLiium, lhoio will Lo no iolocalion of capilal ano inousliy as liaoo
cosls aio iooucoo. Howovoi, whon iogions aio of asymmoliic sizo, lho homo maikol olocl
will slill giaoually causo agglomoialion as liaoo cosls aio iooucoo. 1hus, lho moool is simplo
ano analylically solvaLlo, Lul can slill pioouco agglomoialion of inousliy whon iogions aio of
asymmoliic sizo.
Locauso of lho simplicily of lho moool il is possiLlo lo hanolo analylically a mulli-counliy
fiamowoik. 1his is impoilanl sinco lho olocls of oconomic inlogialion ano olhoi oconomic
policios on iogions of inloimooialo sizo can nol Lo infoiioo fiomlho usual lwo counliy fiamowoik.
8
2.1 HasIcs
1hoio aio 1 iogions (inloichangoaLly iofoiioo lo as counliios), lwo soclois ano lwo faclois.
Ihysical capilal, amounling lo 1
W
woilowioo, can movo Lolwoon iogions Lul capilal ownois
oo nol. Woikois can movo fiooly Lolwoon soclois Lul aio immoLilo Lolwoon iogions. Counliy,
,, is onoowoo wilh lho shaio :
)
of lho woilo onoowmonl of laLoui 1
W
, ano capilal 1
W
, lhal is,
counliios may Lo of oiloionl sizo, Lul lhoy havo ioonlical capilal laLoui ialios. A homogonoous
gooo is piooucoo wilh a conslanl-ioluins lochnology only using laLoui, whilo oiloionlialoo
manufacluios aio piooucoo wilh incioasing-ioluins lochnologios using Lolh capilal ano laLoui.
All inoiviouals havo lho ulilily funclion
l = C
j
A
C
j

, (1)
whoio j (0, 1) ano 0 aio conslanls, ano C

is consumplion of lho homogonous gooo.

Manufacluios onloi lho ulilily funclion lhiough lho inoox C
A
, oolnoo Ly
C
A
=
_
_
.
_

c
oo
i
di
_
_
oo
, (2)
Loing lho mass of vaiiolios consumoo, c
i
lho amounl of vaiioly i consumoo, ano o 1 lho
olaslicily of suLslilulion.
Lach consumoi sponos a shaio j of his incomo on manufacluios, ano lho lolal oomano foi
a oomoslically piooucoo vaiioly i in counliy , is lhoiofoio
r
i
= j
j
o
i
.
_
I
j
o
I
d/
1
)
, (8)
whoio j
i
is lho piico of vaiioly i, ano 1
)
incomo in counliy ,.
1ho unil facloi ioquiiomonl of lho homogonoous gooo is ono unil of laLoui. 1his gooo is
fiooly liaooo, ano sinco wo also chooso lhis gooo as lho numoiaiio wo havo
j

= n = 1, (4)
n Loing lho wago of woikois in all counliios.
Wo assumo ownoiship of capilal lo Lo fully inloinalionally oivoisiloo, lhal is, if ono iogion
owns x poiconl of lho woilo capilal slock, lho iogion will own x poiconl of lho capilal in oach
iogion. Incomo in counliy , is lhoiofoio givon Ly
1
)
= :
)
_
1
W

1
W
_
, ()
whoio

is lho avoiago ioluin lo capilal, ooloiminoo Ly lho conoilion 1
W

= j1
W
,o. 1hus,
lho woilo ioluin lo capilal oquals woilo opoialing pioll. Woilo oxponoiluio in luin oquals
woilo facloi incomo 1
W
= 1
W
j1
W
,o, which givos 1
W
=
1

jo
. 1ho avoiago ioluin lo
capilal is lhoiofoio conslanl ano givon Ly
4

= q
1
W
1
W
, q
j
o j
. (6)
In lho pioouclion of oiloionlialoo gooos, lho lxoo cosl consisls of capilal whoioas lho
vaiiaLlo cosl consisls of laLoui. 1ho lolal cosl of piooucing r
i
unils of manufacluioo commooily
i in iogion , is
TC
)
= c
)
,r
i
, (7)
whoio c is lho lxoo cosl of capilal, ano , lho ioquiiomonl of unskilloo laLoui poi unil r. Wo
will chooso unils of capilal so lhal c = 1, which implios lhal lho woilo capilal slock oquals lho
woilo mass of lims 1
W
=
W
.
Dislanco is iopiosonloo Ly liaoing cosls. Shipping lho manufacluioo gooo involvos a fiic-
lional liaoo cosl of lho icoLoig" foim: foi ono unil of gooo fiom counliy , lo aiiivo in counliy
/, t
)I
1 unils musl Lo shippoo. 1iaoo cosls aio also assumoo lo Lo oqual in Lolh oiioclions
so lhal t
)I
= t
I)
.
Iioll maximisalion Ly manufacluiing lims loaos lo piico
j
)
=
o
o 1
,, (8)
of oach oiloionlialoo commooily; choosing unils of r so lhal , (o 1),o givos j
)
= 1.
Wilh a lxoo capilal slock ano fioo onliy lho iowaio lo capilal will Lo Lio up unlil lho onliio
opoialing suiplus goos lo capilal. 1hal is
(1 ,)r
)
=
)
, (0)
implying lhal
r
)
= o
)
. (10)
2.2 SLort-run equIIILrIun
In lho shoil iun, lho allocalion of
W
is lakon lo Lo lxoo. 1ho moool is closoo Ly lho M-socloi
maikol-cloaiing conoilion, whoio lho lofl-hano sioo (supply) is ooiivoo fiom (10) ano lho iighl-
hano sioo follows fiom lho oomano funclions in (8) oxploiling lhal all vaiiolios havo piooucoi
piico 1,
o
)
=
j1
)
1
o
)

|,|)
c
)|
j1
|
1
o
|
, (11)
whoio = 1, 2...1 ano
1
o
)
= :
)


|,|)
c
)|
:
|
, (12)
ano whoio :
)
is lho mass of vaiiolios piooucoo in iogion ,. 1ho oLjocl c
)|
= t
o
)|
, ianging
Lolwoon 0 ano 1, slanos foi "fioonoss" of liaoo Lolwoon , ano | (0 is aulaichy ano 1 is zoio
liaoo cosls).

1ho amounl of unskilloo laLoui in manufacluiing oquals

W
,r. SuLsliluling r fiom (10)
givos
W
,r
)
= (o 1)
)

W
. Wo iulo oul coinoi solulions Ly assuming lhal foi any iogion
, hosling an agglomoialion, :
)
(o 1)

W
,1
W
= q(o 1) holos.
1
1his onsuios lhal lho
agiiculluial socloi is aclivo in all iogions.
2.3 Long-run equIIILrIun
In lho long iun, capilal is fully moLilo Lolwoon iogions ano iosponsivo lo lho inconlivos pioviooo
Ly lho iolalivo ioluins lhal can Lo allainoo in lho lhioo iogions. 1hoio aio lwo lypos of long-iun
oquiliLiia. Inloiioi oquiliLiia aio chaiacloiisoo Ly lho allocalion of somo capilal in oach iogion
ano an oqual ioluin lo capilal in all iogions. Coinoi solulion lypo of oquiliLiia onlails ono oi
lwo iogions wilhoul capilal, sinco capilal woulo onjoy a lowoi ioluin in lhal localion.
Conliaiy lo mosl now oconomic googiaphy moools lho moool in lhis papoi ooos nol oisplay
ciiculai causalily ano accoioingly, ooos nol oisplay mulliplo oquiliLiia oi Lifuicalions. 1ho
ioason is lhal lho usual oomano ano supply links aio aLsonl, sinco ioluin lo capilal is iopaliialoo
ano capilal movo accoioing lo nominal ioluin which culs lho piico inoox olocl. Howovoi,
ouo lo lho `homo maikol olocl`, lho moool slill piooucos agglomoialion whon iogions aio of
oiloionl sizo. Lssonlially lhis is a maikol accoss alocl; lho M-socloi savos lianspoil cosls Ly
conconlialing in laigoi maikols. Howovoi, incioasoo compolilion whon lims conconlialo in ono
maikol oampons lhis olocl, ano piocluoos full agglomoialion fiom always Loing lho oquiliLiium.
Assuming symmoliic liaoo cosls, ano using (), (6), (11), ano (12) lo solvo lho moool foi
inloiioi oquiliLiia whoio
)
=
|
, ,, | , givos
:
)
=
1
1

_
:
)

1
1
_
(11)c 1
1 c
. (18)
1hus, lho mass of lims in a iogion ooponos on ils sizo ano lho lovol of liaoo cosls. Nolo lhal
lho only paiamolois ooloimining localion aio c ano :
)
; j is aLsonl sinco only iolalivo maikol
sizo is of impoilanco.
1ho agglomoialion olocl is oasily soon fiom (18). Diloionlialing :
)
wilh iospocl lo :
)
givos:
d:
)
d:
)
=
(11)c 1
1 c
, (14)
which shows lhal :
)
incioasos moio lhan piopoilionalo lo :
)
foi c 0. 1ho olocl incioasos in
liaoo fioonoss, ano Locomos aiLiliaiily laigo as liaoo cosls appioach zoio. 1his implios lhal
ovon if wo slail oul wilh ono iogion jusl slighlly laigoi lhan lho olhois, il will oLlain lho onliio
M-inousliy if liaoo cosls aio sumcionlly low. 1o oslaLlish which iogion gols lho inousliy in a
oiloionl way, nolo lhal lho ooiivalivo
d:
)
dc
=
_
:
)

1
1
_
1
(1 c)

, (1)
1
foi which aio lho slanoaio paiamoloi valuos usoo Lolow.
6
is posilivo whonovoi :
)
1,1. 1hal is, a iogion wilh laigoi lhan avoiago onoowmonls will
always gain inousliy as liaoo cosls fall as long as lhoso cosls aio symmoliic.
2.4 VeIIare
1ho wago is conslanl ano oqual in all counliios, as is lho ioluin lo capilal, givon Ly (6). Il
lhoiofoio sumcos lo sluoy lho piico inoox lo compaio wolfaio Lolwoon iogions. Solving lho
moool foi an inloiioi oquiliLiium using (), (6), ano (11) implios lhal lho piico inoox may Lo
wiillon:
1
)
= [:
)
((11)c 1)[
o
, a
j
o 1
, , (16)
In lho following wo will uso lho invoiso piico inoox as wolfaio inoicaloi.
3 EcononIc IntegratIon
Wo now luin lo a spocilc caso, which will Lo usoo all lhiu lho policy analysis, whoio lhoio aio
8 iogions of oiloionl sizo: :

. 1ho laigosl iogion 1 coulo Lo lho aioa aiouno lho

capilal, whilo iogion 2 may Lo a iogional conlio. 1iaoo cosls Lolwoon iogion aio foi lho limo
Loing assumoo symmoliic, ano oconomic inlogialion is iopiosonloo Ly a giaoual fall in lhoso
cosls.
3.1 TLe Lase case
In lho Laso caso inousliy iolocalo in iosponso lo oconomic inlogialion wilhoul govoinmonlal
inloivonlion. In all numoiical illuslialions wo assumo slanoaio paiamoloi valuos, o = 4, j = 0.8.
Wo also assumo lho following iogional onoowmonl shaios lhioughoul lho papoi: :

= 0.4, :

=
0.8, ano :

= 0.2. Figuio 1 plols lho shaio of inousliy in lho lhioo iogions as liaoo fioonoss c
is incioasoo. As can Lo soon fiom oqualion (1), ouiing lho lisl slago of inlogialion, lhoio is a
iapio incioaso in inousliy in lho conlial iogion 1 ano a iapio ooclino in lho smallosl iogion 8,
whoioas lhoio is a slow incioaso in iogion 2. 1ho olocl of fuilhoi inlogialion, onco iogion 8 is
complololy ooinousliialisoo, can Lo soon Ly solving lho 8-iogion moool foi :

= 0 :
:
)
=
:
)
c:
I
(:
)
:
I
)(1 c)
, (17)
whoio ,, / 1, 2, , = /. Diloionlialing w.i.l. c givos
d:
)
dc
=
:
)
:
I
(:
)
:
I
) (1 c)

. (18)
1hus, lho iogion wilh laigoi onoowmonls of lho iomaining lwo iogions will gain inousliy as
liaoo cosls aio iooucoo. 1his olocl is shown in lho lguio whoio fuilhoi inlogialion loaos lo a
iapio ooclino in iogion 2, ano a somowhal slowoi incioaso in lho conlial iogion.
7
0.5
1

Industry share
Region 1
Region 3
Region 2
1 0
Figuio 1: 1ho Laso caso
Cloaily lho sconaiio oullinoo in Figuio 1, whoio oconomic inlogialion loaos lo lho ooinouslii-
alisalion of lho poiiphoiy, lios al lho hail of many polilicians woiiios. Sovoial lypos of iogional
policios aio allomploo lo counloiacl such a oovolopmonl. Lofoio luining lo lhis, howovoi, wo
will Liioly oiscuss wolfaio issuos.
3.1.1 VeIIare In tLe Lase case
In oiooi lo sluoy wolfaio, lho poinls al which iogion 8 ano iogion 2 Locomo ooinousliialisoo
musl lisl Lo oslaLlishoo. Using (18) lho lisl iogion , losos il`s inousliial Laso whon c

=
c

.
Solving lho moool wilh :

= 0 makos il oasy lo calculalo lho poinl al which lho socono iogion

Locomos ooinousliialisoo: c

=
c

c
. Foi oui paiamoloi valuos c

= 1,8, ano c

= 7,0.
Socono lho piico inoicos as iogion | loosos ils inousliy aio
1
)
=
_
:
)
:
)
:
I
(c 1)
_
o
, (10)
1
|
= c
o
, ,, /, | 1, 2, 8, , = /, / = |, , = |
whoioas whon lho inousliy is fully agglomoialoo in , lho piico inoicos aio
1
)
= 1, (20)
1
I
= 1
|
= c
o
, ,, /, | 1, 2, 8, , = /, / = |, , = |.
Figuio 2 plols lho invoiso piico inoicos fiom (16), (10), ano (20) as wolfaio moasuio coiio-
sponoing lo Figuio 1. Il is nol suipiising lhal wolfaio incioasos wilh inlogialion in laigo iogions
8
gaining inousliy. In small iogions, on lho olhoi hano, lho gain fiom choap impoil of foioign
vaiiolios is laigoi sinco a laigoi shaio of consumplion consisls of impoiloo vaiiolios. As can Lo
soon fiom (16), (10), ano (20) lhis olocl will always oulwoigh lho olocl of oolocaling inousliy.

Welfare index
Region 1
Region 3
Region 2
0
1
1
Figuio 2: Wolfaio in lho Laso caso
1hus, oconomic inlogialion givos iising wolfaio in all iogions as woll as convoigonco in wolfaio
lovols. Nolo, howovoi, lhal wo havo assumoo an oqual poi capila onoowmonl of capilal in all
iogions. If capilal ownoiship woio unoqually oisliiLuloo among iogions lho piico inoox olocl
woulo loao lo convoiging Lul novoi oqual wolfaio, sinco incomo woulo Lo highoi in iogions iich
in capilal, ovon as lho piico inoox is oqualisoo ovoiywhoio.
4 HegIonaI oIIcy
As inoicaloo Ly lho wolfaio analysis aLovo, il is nol cloai in lhis moool lhal govoinmonls woulo
wanl lo puisuo iogional policy lo counloiacl conconlialion of inousliy. Howovoi, lho moool
is cloaily loo slylisoo foi a soiious wolfaio assossmonl. Many ialionalos foi iogional policy aio
oulsioo lho moool, o.g. localisoo puio oxloinalilios associaloo wilh pioouclion, ano aojuslmonl
cosls associaloo wilh changos in omploymonl oi localion. Wo will lhoiofoio nol iopoil wolfaio
olocls in lho following policy oxpoiimonls.
Nolo also lhal polilical oconomy consiooialions coulo loao lo iogional policy ovon if ovoiall
wolfaio olocls of lho policy woio nogalivo.
2
Hoio lho localional consoquoncos of oiloionl lypos
of iogional policios aio analysoo simply laking lho policy as oxogonous.
2
Soo IoLoil-Nicouo ano SLoigami (2001), ano Lalowin ano IoLoil-Nicouo (2002).
0
4.1 HeIocatIon oI governnentaI actIvItIes to tLe erILery
An oflon pioposoo, ano somolimos onacloo, policy is lo iolocalo govoinmonlal agoncios ano
similai inslilulions lo poiiphoial iogions. In loims of oui moool, imagino lhal pail of lho capilal
slock :
G
1
W
is unooi govoinmonl commano, which implomonls iogional policy Ly localing lho
capilal lo lho poiiphoiy. Foi simplicily, also assumo lhal lho oisliiLulion of lho ioluin lo capilal
is unalocloo Ly lho iolocalion of govoinmonlal capilal.
8
Fiisl assumo lhal lho govoinmonl placos ils capilal in lho smallosl iogion 8. 1his implios
lhal
:

= max
:

(2c 1) c
1 c
, :
G
1
W
. (21)
Figuio 8 shows lho oquiliLiium localion of inousliy as solio linos whon :
G
= 0.1, compaioo
lo lho Laso caso. 1ho policy ooos oocioaso lho oominanco of iogion 1. Howovoi, il also huils
iogion 2 - lho olhoi small iogion. 1ho nol gain in inousliy foi lho lwo poiiphoial iogions is lhus
consiooiaLly lowoi lhan :
G
1
W
, al loasl unlil lho lovol of inlogialion ioachos lho poinl whoio
all inousliy woulo ono up in iogion 1 aLsonl lho iogional policy.
0.5
1

Industry share
Region 1
Region 3
Region 2
1 0
Figuio 8: Localion of capilal lo lho poiiphoiy
1ho olocl of placing govoinmonlal capilal in iogion 2 can also Lo infoiioo fiom Figuio 8.
1ho Laso caso applios unlil lho inousliy shaio in iogion 2 ioachos :
G
, al which poinl iogions 2
ano 1 slays lal al 10 ano 00.
1ho policy oosciiLoo so fai implioo moving capilal Lul nol laLoui, lhal is, il coiiosponos
lo moving a govoinmonl agoncy Lul nol il`s poisonnol. Howovoi, anolhoi possiLilily is lhal lho
omployoos movo wilh lho agoncy. In loims of lho moool lhis moans a shifl in :
)
ialhoi lhan :
)
.
8
1ho oasiosl way foi lhis lo holo is lo assumo lhal planls nooo localion poimils issuoo Ly lho govoinmonl.
10
Consiooi, foi inslanco, a poiconl shifl in :
)
fiom iogion 1 lo iogion 8. 1ho solio linos in Figuio
4 show lho iosulling conlguialion of inousliy givon Ly oqualions (18) ano (17). Onco moio,
lho oulcomo is compaioo lo lho Laso caso. 1ho policy ooos nol piovonl almosl all inousliy
fiom agglomoialing in lho laigo iogion whon inlogialion is sumcionlly ooop. Howovoi, il givos a
Loosl lo inousliy in Lolh poiiphoial iogions Lofoio full agglomoialion occuis, ano conliaiy lo
lho piovious caso lho policy loaos lo gains foi iogion 8 nnJ iogion 2. 1his happons sinco iogion
2 has incioasoo in sizo compaioo lo iogion 1 (soo oqualion (18)).
1
1
Industry Share

0.5
0.5
region 2
region 3
region 1
Figuio 4: Localing capilal ano laLoui lo lho small iogion
Finally consiooi insloao shifling poiconl of :
)
fiom iogion 1 lo iogion 2. 1his loaos lo a
iaoically oiloionl olocl compaioo lo iolocaling lo iogion 8, as illuslialoo in Figuio . Whilo
iogion 8 is unalocloo compaioo lo lho Laso caso, iogion 2 is nuogoo inlo paiily wilh lho laigo
11
iogion ano lhus, lho oulcomo is a symmoliic allocalion of inousliy in iogion 1 ano 2.
0.5
1

Industry share
Region 3
Region 1,2
1 0
Figuio : Localing capilal ano laLoui lo lho iogional conlio
1hus, lho conclusions fiom lhis oxpoiimonl aio lisl lhal, if policy makois wish lo mainlain
inousliy in smalloi iogions, il is impoilanl lo mako suio lhal oxponoiluios iiso in lho suppoiloo
iogion. Socono lhal il makos moio sonso lo liy lo oslaLlish a viaLlo inousliy in a iogional conlio
lhal alioaoy has an inousliial Laso, ialhoi lhan in lho aLsolulo poiiphoiy.
4.2 InIrastructure rojects
Infiasliucluio piojocls conslilulo a common foimof iogional policy. 1his lypo of policy has oflon
como in lho foim of now ioaos oi now iailioaos, ano a moio ioconl oxamplo is lho consliuclion
of lLoi oplic nols foi high spooo oala liansmission. 1ho lypical policy involvos impioving
communicalion Lolwoon lho conlio ano smalloi iogions. In loims of lho moool, consiooi a
policy lhal consisling of iooucing liaoo cosls Lolwoon iogion 1 ano lho olhoi iogions, whoioas
liaoo cosls iomain unchangoo Lolwoon iogion 2 ano 8. Solving lho moool wilh c

= c

= c,
givos
:

=
2(1 :

)c

(:

c)(1 c

)
(1 c)c

c(8 2c) 1
. (22)
1ho olocl of incioasing c, ovalualoo al symmoliic liaoo cosls, is shown Ly
d:

dc

=
:

(2c 8) 1
(1 c)

. (28)
Iogion 1 will always gain inousliy fiom lhis policy if :

1,8. Consoquonlly lho olhoi iogions

will loso inousliy as iogion 1 Locomos lho huL.
4
1hus, lhis policy aggiavalos lho ooinousliiali-
salion of lho poiiphoiy. Nolo also lhal lho ooiivalivo in (28) is nogalivo if :

is small ano c is
4
A huL olocl is also shown in Lalowin ol.al. (2008) ano Iuga ano VonaLlos (1007).
12
low. 1his implios lhal a small iogion wilh loss lhan avoiago onoowmonls may loso inousliy if
il Locomos lho huL. 1ho oxplanalion foi lhis is simply lhal a small iogion is inloiosling as a
localion oxaclly Locauso high liaoo cosls piolocl ils maikol. 1his `laiil jumping` aigumonl foi
localing in a small maikol vanishos as liaoo cosls fall.
Noxl consiooi insloao a policy of impioving infiasliucluio in lho poiiphoiy, lhal is, an
incioaso in c

kooping c unchangoo. Diloionlialing (22) wilh iospocl lo c

givos
d:

dc

=
2c:

(1 c

2c)

, (24)
which is always nogalivo. 1hus, impioving infiasliucluio &.h.n lho poiiphoiy loaos inousliy
lo localo away fiom lho conlio lo lho poiiphoiy. 1ho olocl also Locomos sliongoi wilh an
incioasing c.
1o Lo spocilc, consiooi an infiasliucluio policy, which incioasos c

so lhal c

= 1.1c.
Figuio 6 shows inousliy shaios as c is incioasoo. Cloaily, compaioo lo lho Laso caso, lho policy
movos inousliy oul of iogion 1 as inoicaloo Ly (24). 1ho winnoi is iogion 2 which now has a
faiily conslanl ano foi high c incioasing inousliy shaio. 1ho ioason why iogion 2 ialhoi lhan
iogion 8 gains inousliy is lho samo as lho mochanism making lho ooiivalivo in (28) nogalivo foi
small :

: A iogion wilh onoowmonls Lolow avoiago losos inousliy whon liaoo cosls aio iooucoo.

Industry share
1
0.2 0.8
Region 1
Region 2
Region 1
Figuio 6: Impioving infiasliucluio Lolwoon poiiphoial iogions
1hus, lho conclusion fiom lhis oxpoiimonl is lhal policy makois, lhal wish lo mainlain
inousliy in lho poiiphoiy, shoulo impiovo infiasliucluio Lolwoon ano wilhin poiiphoial iogions
ialhoi lhan jusl Lolwoon lho conlio ano lho poiiphoiy.
18
4.3 HegIonaI SuLsIdIes
A lhiio foim of iogional policy is ouliighl suLsioios lo oisaovanlagoo iogions. 1ho foim of lhis
suLsioy ano ils lnancing can vaiy, Lul in a lypical caso iogional suLsioios aio lnancoo lhiough
lho iogulai Luogol. Il is hoio assumoo lhal suLsioios aio lnancoo Ly a piopoilional counliywioo
incomo lax t which, Locauso of lho inolaslic laLoui supply, is lump-sum in naluio. SuLsioios .
)
aio piopoilional ano iogion spocilc, ano aio foi simplicily givon lo capilal only. 1hal is, lhoy
may Lo viowoo as invoslmonl suLsioios.
1ho inlioouclion of suLsioios lo capilal moans lhal lho fioo onliy conoilion (0) is mooiloo
accoioing lo:
(1 ,)r
)
=

)
1 .
)
, (2)
which moans lhal
r
)
=
o
)
1 .
)
. (26)
1ho now M-socloi maikol cloaiing conoilion, coiiosponoing lo oqualion (11), incoipoialo lhis
ano lho facl lhal oomano is Lasoo on afloi lax incomo (1 t)1
)
in oach iogion ,. 1ho long-iun
oquiliLiium localion of capilal is ooloiminoo Ly lho conoilion lhal lho afloi suLsioy ioluin is
oqualisoo among iogions:
(1 .

= (1 .

= (1 .

. (27)
Finally, Lalancoo Luogol is assumoo

)
.
)

)
:
)
= t

)
1
)
= t
o
o j
1
W
. (28)
1his conoilion ooloiminos lho lax ialo foi any givon suLsioy schomo. Nolo, howovoi, lhal lho
unifoim lax ialo can Lo facloioo oul of lho oxpiossions foi iolalivo ioluins lo capilal. 1hal is,
lho lax ialo ooos nol alocl lho long iun localional oquiliLiium sinco laxos onloi as a piopoilional
facloi on incomo in all iogions.
Solving lho moool in a caso whoio iogion , iocoivos suLsioios givos lho mass of vaiiolios in
lho suLsioisoo iogion
:
c&bc
)
=
(1 .
)
)

_
2c

(:
)
1) :
)
(1 c)

c
(c 1)
_
(2.
)
.

)
)(2c 1):
)
2(.
)
1)

c c 1
_. (20)
Ly inspoclion lho oxpiossion goos lo inlnily as c goos lo ono. 1his iolocls lho facl lhal any
suLsioy will oominalo lho localional choico of lims whon liaoo cosls aio sumcionlly low, sinco
lims, :. n:.h&, aio inoiloionl lo localion al fioo liaoo.
Foi conciolonoss, consiooi oui usual inlogialion oxpoiimonl, Lul wilh a suLsioy, .

= 0.08,
lo capilal in lho small iogion 8 lnancoo Ly a lax on laLoui in all iogions. Figuio 7 plols (20)
14
as woll as lho numLoi of vaiiolios in iogions 1 ano 2 as liaoo cosls aio iooucoo. Onco moio,
lho oulcomo is compaioo lo lho Laso caso. 1ho olocl of lho suLsioy is small foi a laigo iango
of liaoo cosls. 1ho ooinousliialisalion of iogion 8 is somowhal poslponoo Lul nol avoiooo.
Howovoi, whon liaoo cosls Locomo sumcionlly low lho suLsioy lo iogion 8 comos lo oominalo
lho localional choico of lims. Consoquonlly iogion 8 ioinousliialisos as soon in Figuio 7.
0.5
1

Industry share
Region 1
Region 3
Region 2
1 0
Region 3
Region 1
Figuio 7: Invoslmonl suLsioy lo iogion 8
As a miiioi imago lo Figuio 7, Figuio 8 plols lho suLsioy nocossaiy lo koop lho inousliy shaio
in iogion 8 conslanl al ils aulaichy lovol of 20 poiconl.

Agglomoialion ionls aio Loll-shapoo

in c in lhis lypo of moool, ano lho oisaovanlago of lho smallosl iogion is lhoiofoio maximal foi
inloimooialo liaoo cosls.
6
1hus, lho analysis poinls oul lhal lho omcioncy of iogional suLsioios
is voiy much ooponoonl on lho lovol of inlogialion. 1ho cosl of mainlaining inousliy in lho
poiiphoiy may Lo moooialo if inlogialion is allowoo lo piocooo sumcionlly fai.

1ho algoLiaic oxpiossion foi lho suLsioy is nol voiy iovoaling, ano wo lhoiofoio supioss il.
6
Soo Lalowin ol.al. (2008) chaploi 2, foi a oiscussion of lho Lollshapoo agglomoialion ionls.
1

0
0.04
1
0.08
0.2
Subsidy level (z
3
)
Figuio 8: SuLsioy nocossaiy lo koop :

= :

5 ConcIusIon
1his papoi analysos sovoial iogional policios aiming al kooping oi incioasing inousliial aclivily
in poiiphoial iogions using a lhioo iogion fiamowoik. Il is lisl shown how oconomic inlogialion
can loao lo a complolo ooinousliialisalion of lho poiiphoiy aLsonl govoinmonl policy. In lhis
moool, inlogialion slill loaos lo incioasing wolfaio in all iogions, as woll as a convoigonco in
wolfaio Lolwoon iogion. Lvon lhough lho moool is loo slylizoo foi a soiious wolfaio assossmonl,
lhis iosull inoicalo lhal lho Lasis foi iogional policy may Lo woakoi lhan is commonly Loliovoo.
In any caso, lho ioal woilo olois aLunoanl oxamplos of iogional policy, ano il is lhoiofoio
of inloiosl lo analyso ils impacl on inousliy localion. 1ho lisl policy lioaloo involvos iolo-
caling govoinmonl agoncios ano similai inslilulions lo poiiphoial iogions. 1ho conclusion fiom
lhis oxpoiimonl is lhal il is impoilanl lo localo aclivilios in iogional conlois ialhoi lhan in
lho aLsolulo poiiphoiy if lho goal is lo pioouco a viaLlo agglomoialion, which can soivo as a
counloiwoighl lo lho laigo iogion. Socono, foi lhis policy lo Lo oloclivo caio shoulo Lo lakon
lo onsuio lhal oxponoiluios iiso in lho poiiphoiy. Jusl iolocaling capilal, whoio lho ioluin is
iopaliialoo, will nol holp inousliialising lho poiiphoiy.
Socono, infiasliucluio policios aio analysoo. Il is shown how lho common policy of im-
pioving lho infiasliucluio (o.g. Luiloing ioaos) Lolwoon lho laigo conlial iogion ano poiiphoial
iogions can aclually spooo up lho ooinousliialisalion of lho poiiphoiy. Howovoi, an impiovoo
infiasliucluio Lolwoon poiiphoial iogions can sliongly incioaso lho alliaclivonoss of somo of
lhoso iogions.
Finally, suLsioios aio analysoo. 1hoso lono lo Lo oloclivo whon agglomoialion foicos aio
woak. Sinco lhoso foicos aio hump-shapoo in liaoo cosls, suLsioios aio oloclivo Lolh al a low
16
ano high oogioo of oconomic inlogialion. Iolaling lo lho mixoo succoss of LU`s iogional policy,
il is possiLlo lhal lhis policy will Lo moio oloclivo as inlogialion in Luiopo is oooponoo.
Gonoially, lho analysis of a lhioo iogioncounliy-fiamowoik, as opposoo lo lho cuslomaiy
lwo iogion moools, loaos lo sovoial impoilanl insighls. In, pailiculai lho olocls on iogions of
inloimooialo sizo Locomo non-monolono in a way lhal can nol Lo infoiioo fiom a lwo iogion
moool. 1his also implios lhal ompiiical spocilcalions Lasoo on lwo iogion fiamowoiks, in
piinciplo, aio misspociloo.
17
HeIerences
Lalowin I., Foislio I., Mailin I., Ollaviano G. ano F. IoLoil-Nicouo, 2008. Lconomic goog-
iaphy ano puLlic policy, Iiincolon Univoisily Iioss.
Lalowin I. ano F. IoLoil-Nicouo, 2002. Lnliy ano Asymmoliic LoLLying: Why Govoin-
monls Iick Losois, NLLI Woiking Iapoi, no.876.
ComLos I-I ano H.Ovoiman, 2008. 1ho spalial oisliiLulion of oconomic aclivilios in lho
Luiopoan Union, foilhcoming in HanoLook of UiLan ano Iogional Lconomics, vol. 4, V.
Honooison ano J.-F. 1hisso (oos.), Llsovioi-Noilh Hollano, Amsloioam.
Dixil, A. ano J. Sliglilz, 1077. Monopolislic compolilion ano oplimum piooucl oivoisily.
Amoiican Lconomic Ioviow 67: 207-808.
Duponl V. ano I. Mailin, 2008. Iogional Iolicios ano Inoqualilios: Aio SuLsioios Gooo foi
You, mimoo, Univoisily of Iaiis 1.
Fujila, M., I. Kiugman ano A.J.VonaLlos, 1000. 1ho Spalial Lconomy: Cilios, Iogions ano
Inloinalional 1iaoo. MI1 Iioss, CamLiiogo, Massachusolls.
Holpman L. ano I.Kiuman, 108. Maikol Sliucluio ano Foioign 1iaoo, MI1 Iioss, Cam-
Liiogo, Massachusolls.
Kiugman, I. 1080, Scalo Lconomics, Iiooucl Diloionlialion, ano lho Ialloin of 1iaoo,
Amoiican Lconomic Ioviow 70: 00-0.
Kiugman, I., 1001. Incioasing ioluins ano oconomic googiaphy. Jouinal of Iolilical Lcon-
omy 00:488-00.
Kiugman, I. ano A. VonaLlos, 100. GloLalizalion ano lho inoqualily of nalions. Quailoily
Jouinal of Lconomics 60: 87-80.
Mailin, I. ano C.A. Iogois, 100. Inousliial localion ano puLlic infiasliucluio, Jouinal of
Inloinalional Lconomics 80, 88-81.
Mioolfail-Knaivik K.H. ano H. Ovoiman, 2002. Dolocalion ano Luiopoan Inlogialion: is
sliucluial sponoing jusliloo, Lconomic Iolicy 17: 828-80.
Iuga D. ano A. VonaLlos,1007.Iiofoionlial liaoing aiiangomonls ano inousliial localion,
Jouinal of Inloinalional Lconomics, 48: pp.847-868.
IoLoil-Nicouo F. ano F.SLoigami, 2001,Lnoogonous Iogional Iolicy in a Moool of Agglom-
oialion ,HLI Woiking Iapoi 2001:2.
18