Agglomeration and Growth in the NEG: a critical assessment

This chapter is divided into two parts. In the first part we review the main results of a typical New Economic Geography and Growth (NEGG) model (Baldwin and Martin, 2003) and assess the contribution of this literature to the issue of long-run income gaps between countries. In the second part we discuss the robustness in some results of these models which are directly linked to important policy implications and we show that these results crucially depend on very restrictive values of some parameters of the model. In particular, depending on the different values of the degree of love for variety and the elasticity of substitution between traditional and manufacturing goods, our analytical examples reveal that - a) when trade is costly enough the symmetric equilibrium might not be stable also when capital is perfectly mobile; b) the rate of growth might depend on the geographical allocation of industries also when spillovers are global and, c) when industrial firms are concentrated in only one region, countries might not grow at the same rate in real terms.