Abstract
Abstract We analyse how spatial disparities in innovation activities, coupled with migration costs, affect economic geography, market structure, growth and regional inequality. We provide conditions for existence and uniqueness of a spatial equilibrium, and for the endogenous emergence of industry clusters. Spatial variations in knowledge spillovers lead to spatial concentration of more innovative firms. Migration costs, however, limit the concentration of economic activities in the most productive region. Narrowing the gap in knowledge spillovers across regions raises growth, and reduces regional inequality by making firms more sensitive to wage differentials. The associated change in the industry concentration has positive welfare effects.
Highlights
Firm market power has increased across all sectors in the US, as recently documented by De Loecker and Eeckhout (2018), with the rise in mark-ups mainly driven by few firms concentrated in the upper tail, and market shares moving from low to high mark-up firms
2 Aloi, Poyago-Theotoky and Tournemaine inequality? We investigate this question within a setup which encompasses industry location and R&D-led growth with three distinctive features: (i) an endogenous market structure characterised by oligopolistic firms conducting R&D, (ii) spatially constrained knowledge flows and (iii) migration costs
We have shown that disparities in knowledge spillovers between regions lead to spatial concentration of industries, and the latter is associated with fewer, but more innovative
Summary
Firm market power has increased across all sectors in the US, as recently documented by De Loecker and Eeckhout (2018), with the rise in mark-ups mainly driven by few firms concentrated in the upper tail, and market shares moving from low to high mark-up firms (except for the retail industry). Rather than assuming one or the other type of spillover, we take into consideration both the strength and spatial extent of knowledge externalities, and show how regional disparities in innovation-enhancing activities, rather than transport frictions, can affect both industry location and growth Both Baldwin and Forslid (2000); Martin and Ottaviano (2001), develop growth-and-geography models featuring monopolistic competition, endogenous industrial location and inter-regional migration, with the aim to analyse the spatial evolution of economic activities. Our present contribution resonates with recent work on spatial economics incorporating trade costs and labour mobility, where part of the spatial variation in income across regions is explained by variations in trade costs (Allen and Arkolakis (2014); Desmet et al (2018)) From this literature, we focus on the endogenous emergence of industry clusters, growth and inter-regional inequality.
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