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Spatial Equilibria: The Case of Two Regions

Author

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  • Kucheryavyy, Konstantin
  • Lyn, Gary
  • Rodríguez-Clare, Andrés

Abstract

In this paper we characterize the set of equilibria in a generalized version of the canonical two-region economic geography model that nests the class of models in Allen and Arkolakis (2014) as well as Krugman (1991) and features an input–output loop. We provide sufficient conditions for uniqueness of equilibria that — in contrast to the well-know result in Allen and Arkolakis (2014) — allow for positive agglomeration externalities, which concentrate economic activity, even in the absence of congestion effects, which disperse it, and highlight the key role played by three additional parameters: the trade elasticity, which regulates the strength of the dispersion force associated with the decline in the terms of trade caused by migration into a region; trade costs, which weaken this dispersion force by limiting trade across regions; and the importance of the agricultural sector, which pushes against agglomeration forces in manufacturing.

Suggested Citation

  • Kucheryavyy, Konstantin & Lyn, Gary & Rodríguez-Clare, Andrés, 2024. "Spatial Equilibria: The Case of Two Regions," Journal of International Economics, Elsevier, vol. 152(C).
    • Handle: RePEc:eee:inecon:v:152:y:2024:i:c:s0022199624001351
    DOI: 10.1016/j.jinteco.2024.104008
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    Keywords

    Economic geography; Agglomeration externalities; Trade;
    All these keywords.

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • R1 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics
    • D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General

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