Abstract
This article sets up a new economic geography model with diminishing marginal returns to labor and capital and examines the effect of capital liberalization on industrial agglomeration and wage inequality. The simulation results indicate that, for a country with strict capital controls, capital liberalization is able to reduce the wage difference between countries in both nominal and real terms. It is also shown that the diminishing marginal returns and the increasing returns to scale have opposite effects on the location of economic activities: the effect of increasing returns to scale is prone to agglomerating economic activities into larger economies, while the effect of diminishing marginal returns tends to decentralize economic activities.
Published Version
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