Agglomeration and Specialization Patterns when Firms and Workers are Footloose

Agglomeration and Specialization Patterns when Firms and Workers are Footloose

In new economic geography models, geographic concentration cant arise because of workers mobility or vertical linkages between firms. We examine a setup that combines those two approaches in conjunction with local congestion costs. We find that, as trade costs are lowered, the geographic concentration of total activity (agglomeration) follows an inverse u-shaped evolution, while the degree of specialization of regions increases. These results shed light on regional development within a country as integration proceeds: when trade costs are hight, firms evenly spread between the regions to supply local demand at low costs, hence diversified regions; at intermediate trade costs, we have coexistence of a diversified core and a specialized periphery and at low trade costs, each industry clusters in one region to fully exploit returns to scale externalities. US city centers and non-metropolitan areas during the period 1850-1990 depict such specialization and agglomeration patterns. These results show that a country`s effort to miprove accessibility across its porfolio of places can favor a win-win regional allocation of firms based on each location`s competitive advantage.