A synthesis of footloose-entrepreneur new economic geography models: when is agglomeration smooth and easily reversible?

Abstract

Models of the new economic geography share a number of common conclusions, but also exhibit notable differences, in particular with respect to the shape of the location pattern. Some models imply a catastrophic agglomeration process with hysteresis, so that concentration in one region is not easily reversible. Other models suggest that agglomeration may be smooth, easily reversible and not necessarily feature extreme ‘bang-bang’ outcomes. These differences reflect the fact that new economic geography models have relied heavily on specific functional forms. In this article we approach the properties of a particular class of new economic geography models, the class of ‘footloose entrepreneur models’, with a unifying framework based on the indirect utility function of mobile agents. We are able to provide general, yet handy, formulae to determine the break point and the bifurcation pattern. An application of this framework allows us to show how specific results in the literature can be reconciled as special cases, so that the origin of their differences can be highlighted.