Endogenous Technical Progress and Spillovers in a Vertically-Linked Model of Economic Geography

Abstract

Technology has generated vast economic surpluses, but has also driven extreme and growing economic inequality due to the self-reinforcing nature of technical progress and technology diffusion. Economists have recently renewed their interest in the important role of geography in the creation and diffusion of technology – and hence in economic development and inequality. This paper contributes to this effort by introducing a simple endogenous growth process in which labor productivity increases with industry size and spillovers between regions are possible into a core-periphery vertically-linked model(1996). Rather than isolating their effect, this paper studies the implications of adding endogenous growth and spillovers to the existing vertical linkages of the Puga and Venables (1996) model. Multiple equilibria may obtain when endogenous growth with spillovers is added. While endogenous technical progress is generally an agglomeration forced and spillovers are a dispersion force, the strength of these forces is mediated by trade costs. Finally, the dispersion forces associated with increasing spillovers and relatively low, falling trade costs mostly operate independently, but there are critical values of trade costs at which the two are strong ‘dispersion complements’ such that a marginal increase in spillover scope significantly reduces the economic inequality between the two regions. The existence of such tipping points suggests that some countries attempting to increase technology spillovers into its economy may enjoy few development benefits while others may reap substantial gains.