Final Phd Thesis Presentation

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  • 1. Introduction Aggl. and Growth with Endogenous Expenditure SharesRegional Growth with Int. Knowledge Spillovers Essays in New Economic Geography Doctoral Thesis of Francesco Mureddu March 26, 2009 Doctoral Thesis of Francesco MuredduEssays in New Economic Geography

2. Introduction Aggl. and Growth with Endogenous Expenditure SharesRegional Growth with Int. Knowledge SpilloversContents of the Thesis: Literature ReviewIn chapter one we give an overview of the principal NewEconomic Geography (NEG) models: The Core-Periphery (Krugman (1991)) The Footloose capital (Martin and Rogers (1995)) The Footloose entrepreneurs (Ottaviano (1996))In chapter two we describe some of its further developments: The introduction of endogenous growth in a NEG framework (Baldwin and Martin (2004) and Baldwin et al. (2004)) Possibility of a monotonic relation between agglomeration and integration (Bellone and Maupertuis, 2003 and Andres, 2007) Introduction of rms heterogeneity (Melitz (2003), Baldwin and Okubo (2006) and Baldwin and Robert-Nicoud (2008))Doctoral Thesis of Francesco MuredduEssays in New Economic Geography 3. Introduction Aggl. and Growth with Endogenous Expenditure SharesRegional Growth with Int. Knowledge SpilloversContents of the Thesis: Original Extensions to the Theory In chapter three we elaborate the model quot;Agglomeration andGrowth with Endogenous Expenditure Sharesquot; where we use aCES instead of a Cobb-Douglas utility function in thesecond-stage optimization problem In particular we will focus on the study of stability analysis and growth rate. Our benchmark will be the model with global spillovers presented in Baldwin and Martin (2004)In chapter four we elaborate the model quot;Intersectoral Spilloversand Real Income Growthquot; where we introduce intersectoralknowledge spillovers from Innovation to a Non-tradable sector In particular we will focus on the study of the real income growth. Our benchmark will be the model with localized spillovers presented in Baldwin, Martin and Ottaviano (2001) Doctoral Thesis of Francesco MuredduEssays in New Economic Geography 4. Introduction Aggl. and Growth with Endogenous Expenditure SharesRegional Growth with Int. Knowledge Spillovers Essays in New Economic GeographyIntroductionAgglomeration and Growth with Endogenous ExpenditureShares Basics Stability Analysis Growth RateAgglomeration, Welfare and Regional Growth withIntersectoral Knowledge Spillovers Basics Real Growth Rate Regional Welfare Doctoral Thesis of Francesco MuredduEssays in New Economic Geography 5. Introduction Aggl. and Growth with Endogenous Expenditure SharesRegional Growth with Int. Knowledge SpilloversMain Results in Baldwin and Martin (2004)Using a CD utility function in the second-stage optimization the expenditure shares for Manufacture is constant and the elasticity of substitution between the Traditional and the Industrial goods is unitaryImplications on the stability analysis: Catastrophic agglomeration takes place in case of capital immobility: in this case when trade costs fall beyond a certain threshold agglomeration forces overcome the dispersion forcesImplications on the growth analysis: The growth rate is not inuenced by the allocation of economic activities hence it is the same both in the core periphery and in the symmetric conguration Moreover the growth rate is in no way aected by the degree of market integration (trade costs) Doctoral Thesis of Francesco MuredduEssays in New Economic Geography 6. Introduction Aggl. and Growth with Endogenous Expenditure SharesRegional Growth with Int. Knowledge SpilloversExtensions to BM (2004): Implications of Endogenous Expenditure SharesUsing a CES utility function in the second-stage optimization problem, allows for expenditure shares in Industrial goods to be endogenously determined and opens the room to the following implications:Catastrophic agglomeration may always take place, whatever thedegree of market integration, provided that the Traditional and theIndustrial goods are suciently good substitutesThe regional rate of growth is aected by the interregionalallocation of economic activities even in the absence of localizedspillovers, so that geography always matters for growthThe regional rate of growth is aected by the degree of marketopenness: in particular, depending on whether the Traditional andthe Industrial goods are good or poor substitutes, economicintegration may be respectively growth-enhancing orgrowth-detrimentalDoctoral Thesis of Francesco MuredduEssays in New Economic Geography 7. Introduction Aggl. and Growth with Endogenous Expenditure SharesRegional Growth with Int. Knowledge SpilloversMain Results in Baldwin, Martin and Ottaviano (2001) In standard NEGG models the growth rate is equal in bothregions both in cases of global and local spilloversIn case of agglomeration workers remaining in the region wherethere is no longer industry face two opposite welfare eects: A static loss due to the increase in transport costs paid on the Manufacture varieties that have to be imported A positive dynamic eect: if industry is concentrated in case of localized knowledge spillovers the growth rate will be higherThis is due to the introduction of endogenous growth andlocalized spillovers: growth is inuenced by geographySo the increase in economic growth led by agglomeration canbe the welfare counterpart of the static loss, henceagglomeration is always welfare improvingDoctoral Thesis of Francesco MuredduEssays in New Economic Geography 8. Introduction Aggl. and Growth with Endogenous Expenditure SharesRegional Growth with Int. Knowledge SpilloversExtensions to BMO (2001): Implications of Intersectoral SpilloversBy assuming intersectoral and localized knowledge spillovers from the Innovation sector to the Service sector, we show that rms allocation aects regional real growthMore precisely we assume that the unit labour requirements(and thereby the prices) in the Services production are anegative function of the output of Innovation, i.e. the stock ofknowledge capitalDue to this new specication, real growth rates in the tworegions always diverge when the rms allocation pattern diersfrom the symmetric oneThis result has strong policy implications because it suggeststhat concentrating industries in only one region may also bringa dynamic loss for the peripheryDoctoral Thesis of Francesco MuredduEssays in New Economic Geography 9. IntroductionBasics Aggl. and Growth with Endogenous Expenditure Shares Stability AnalysisRegional Growth with Int. Knowledge Spillovers Growth Analysis Essays in New Economic GeographyIntroductionAgglomeration and Growth with Endogenous ExpenditureShares Basics Stability Analysis Growth RateAgglomeration, Welfare and Regional Growth with IntersectoralKnowledge Spillovers Basics Real Growth Rate Regional Welfare Doctoral Thesis of Francesco MuredduEssays in New Economic Geography 10. IntroductionBasics Aggl. and Growth with Endogenous Expenditure Shares Stability AnalysisRegional Growth with Int. Knowledge Spillovers Growth AnalysisThe Economy We have two symmetric regions: North and South (labeled byan asterisk) and three sectors: Modern (Manufacture),Traditional (agriculture) and InnovationThere is only one type of workers interregionally immobile butintersectorally mobile (wages are equal among sectors)The Modern good is produced under Dixit-Stiglitz (1977)monopolistic competition with increasing returns to scale: thexed cost is represented by a unit of capital while the variablecost is represented by aM units of LThe Traditional is homogeneously produced with constantreturns to scale in perfect competition and unit labor costThe Modern good is shipped with Iceberg Trade Costs whilethe Traditional one is freely shippedDoctoral Thesis of Francesco MuredduEssays in New Economic Geography 11. IntroductionBasics Aggl. and Growth with Endogenous Expenditure Shares Stability AnalysisRegional Growth with Int. Knowledge Spillovers Growth AnalysisThe Innovation Sector The Innovation sector works in perfect competition withendogenous growth la Romer (1990)The cost of Innovation in the North is:wF = aI w =KwAs we can see the cost of producing new knowledge decreaseswith the stock of knowledge already createdThe rate of growth of units of capital/varieties is: KK; g = w g= wK K Doctoral Thesis of Francesco MuredduEssays in New Economic Geography 12. IntroductionBasics Aggl. and Growth with Endogenous Expenditure Shares Stability AnalysisRegional Growth with Int. Knowledge Spillovers Growth AnalysisConsumers Problem We have an innite lively consumer who maximizes thefollowing preferences: 1 1 w 1t CM ) + (1 U= e ln Qt ; Qt = (n)CTt=01 K +K 1 1 1 1di; || 1CM = ci i=0 1It is arguable the intersectoral elasticity of substitution 1 islower than the intrasectoral elasticity of substitution The optimal consumption path is given by the Euler equation:E=r E Doctoral Thesis of Francesco MuredduEssays in New Economic Geography 13. IntroductionBasics Aggl. and Growth with Endogenous Expenditure Shares Stability AnalysisRegional Growth with Int. Knowledge Spillovers Growth AnalysisAnalytical Deviations from the Benchmark Model Following Cerina and Pigliaru (2007) we use a CES instead ofa Cobb-Douglas, thereby allowing the elasticity of substitution(1/(1 )) between Manufacture and Traditional good todiverge from the unit value Hence the share of expenditure on Manufacture is no longer constant but it is aected by changes in the price indexFollowing Murata (2008) and Blanchard and Kiyotaki (1987)we abstract from the love for variety There are several empirical analysis assessing a value for the love of variety parameter lower than what assumed in standard NEGG models (see for instance Ardelean 2007) The introduction of the restriction according to which love for variety is none is compensated by the introduction of the parameter which, unlike the standard NEGG models, allows the elasticity of substitution to deviate from the unit valueDoctoral Thesis of Francesco MuredduEssays in New Economic Geography 14. IntroductionBasics Aggl. and Growth with Endogenous Expenditure Shares Stability AnalysisRegional Growth with Int. Knowledge Spillovers Growth AnalysisNormalizations due to the No-specialization ConditionThe Traditional good is shipped without incurring in trade costand is produced under perfect competition. It is thereforeconvenient to choose home labour as numeraire so that: pT = pT = wT = wT = 1 By the No-specialization condition the Traditional sector ispresent in both regions. This together with labor intersectoralmobility let Manufacture wages to be tied to agricultural wageswhich, in turn, remain xed at the level of the unit price: wM = wM = wT = wT = w = 1Doctoral Thesis of Francesco MuredduEssays in New Economic Geography 15. IntroductionBasics Aggl. and Growth with Endogenous Expenditure Shares Stability AnalysisRegional Growth with Int. Knowledge Spillovers Growth AnalysisModern Firm Optimization (1)The optimal pricing rule is the following:p = aM 1 If we take the units of labor per unit of output in Manufactureas aM = ( 1)/ even the varieties prices are normalizes to1, so p = w = 1 and p = p ( represents the trade costs) ijSetting pM the price of a particular variety produced in region iand sold in region j the Manufacture price index becomes:1n 1n1 1= (sn +(1sn )) 1 nw 1(pM )1 di +NN (pM )1 di SNPM =0 0 1n 1n1 1 = (sn +1sn ) 1 nw 1(pM )1 diNS (pM )1 di SSPM =+0 0 Doctoral Thesis of Francesco MuredduEssays in New Economic Geography 16. IntroductionBasics Aggl. and Growth with Endogenous Expenditure Shares Stability AnalysisRegional Growth with Int. Knowledge Spillovers Growth AnalysisModern Firm Optimization (2)The prots are respectively for northern and southern varieties: Ew(1 sE ) sE (sn , )=(sn , ) + K w (sn + (1 sn )) (sn + 1 sn ) Ew(1 sE ) sE = (sn , ) (sn , ) + K w(sn + (1 sn )) (sn + 1 sn )Where = 1 is the so called quot;phi-ness of tradequot; whichranges from 0 (prohibitive trade) to 1 (costless trade)As we can see prots change with the expenditure sharesDoctoral Thesis of Francesco MuredduEssays in New Economic Geography 17. IntroductionBasics Aggl. and Growth with Endogenous Expenditure Shares Stability AnalysisRegional Growth with Int. Knowledge Spillovers Growth AnalysisExpenditure SharesThe expenditure shares, which are constant in steady state are:1 (sn , ) = (1)(1)( 1 ) 1 (sn+ (1 sn ))1+ 1 (sn , ) = (1)(1)1 + ( 1 )(sn + 1 sn ) 1 A crucial feature for our analysis is that the expenditure sharesdepend on Manufacture location and trade costs Doctoral Thesis of Francesco MuredduEssays in New Economic Geography 18. IntroductionBasics Aggl. and Growth with Endogenous Expenditure Shares Stability AnalysisRegional Growth with Int. Knowledge Spillovers Growth Analysis Essays in New Economic GeographyIntroductionAgglomeration and Growth with Endogenous ExpenditureShares Basics Stability Analysis Growth RateAgglomeration, Welfare and Regional Growth with IntersectoralKnowledge Spillovers Basics Real Growth Rate Regional Welfare Doctoral Thesis of Francesco MuredduEssays in New Economic Geography 19. Introduction Basics Aggl. and Growth with Endogenous Expenditure SharesStability AnalysisRegional Growth with Int. Knowledge SpilloversGrowth AnalysisStability of the Symmetric EquilibriumThe ratio of northern and southern Tobins q is: sE(1sE ) (sn , )(sn , )+q(sn +(1sn ))(sn +1sn )= (sE , sn , ) =q (1sE )sE (sn , )(sn , )+ (sn +(1sn ))(sn +1sn )Starting from (sE , sn , ) = 1, an increase (decrease) in(sE , sn , ) will make investments in the North (South) moreprotable and thus will lead to a production shiftingHence, the symmetric equilibrium will be stable (instable) if: (sE , sn , )< (>)0 snsn =sE =1/2 Doctoral Thesis of Francesco Mureddu Essays in New Economic Geography 20. IntroductionBasics Aggl. and Growth with Endogenous Expenditure Shares Stability AnalysisRegional Growth with Int. Knowledge Spillovers Growth AnalysisEndogenous Expenditure Shares: the Capital Imm. CaseIn case of capital immobility we have:22 1 (1 (1/2, ))1 (1 ) sE (sE , sK , ) 4=4 +4 ( 1) (1 ) 1+1+sK (1 + ) sKsK =sE =1/2 Market-crowding Demand-linked SubstitutionIf > ( 0 there are values of the parameter for thesymmetric equilibrium to be unstable for every level of tradecost Doctoral Thesis of Francesco MuredduEssays in New Economic Geography 21. IntroductionBasics Aggl. and Growth with Endogenous Expenditure Shares Stability AnalysisRegional Growth with Int. Knowledge Spillovers Growth AnalysisMechanism of the Substitution EectThe variability of the expenditure shares gives birth to a new force called substitution eect. Lets see how it works:If Manufacture and the Traditional commodities are goodsubstitutes ( > 0) an increase in the share of rm present ina region (say North) determines a decrease in the price indexfor ManufactureHence the share of expenditure in Manufacture (and also theprots) will rise determining an increase in the incentive toinvestThis rise in the incentive to invest will augment the share ofrms owned a region, thereby feedbacking the mechanismIf Manufacture and the Traditional commodities are poorsubstitutes ( < 0) the mechanism is reversedDoctoral Thesis of Francesco MuredduEssays in New Economic Geography 22. IntroductionBasics Aggl. and Growth with Endogenous Expenditure Shares Stability AnalysisRegional Growth with Int. Knowledge Spillovers Growth Analysis Essays in New Economic GeographyIntroductionAgglomeration and Growth with Endogenous ExpenditureShares Basics Stability Analysis Growth RateAgglomeration, Welfare and Regional Growth with IntersectoralKnowledge Spillovers Basics Real Growth Rate Regional Welfare Doctoral Thesis of Francesco MuredduEssays in New Economic Geography 23. Introduction Basics Aggl. and Growth with Endogenous Expenditure SharesStability AnalysisRegional Growth with Int. Knowledge SpilloversGrowth AnalysisGrowth Always Depends on Geography In the benchmark model growth does not depend on geographyand is the same both in Core-Periphery and symmetry:2L ( ) g=Instead in our analysis the growth rate depends on geographyboth in symmetry and in Core-Periphery:2L( (1/2, )) ( (1/2, ))gS = L((1, ) + (1, )) ( (1, ))gC =Clearly the Core-Periphery growth rate can be higher (lower)than the symmetric one according to parameters value:(1, ) + (1, ) > ( ( ( ( ( ( (K ) > K Y P KY P Doctoral Thesis of Francesco MuredduEssays in New Economic Geography 40. Introduction Basics Aggl. and Growth with Endogenous Expenditure SharesReal Growth RateRegional Growth with Int. Knowledge SpilloversRegional WelfareGeography Aects GrowthKKIn the symmetric equilibrium= g hence the real = K Kincome growth is the same: Y PY P (K )g = (K )g =Y PY P In each asymmetric equilibrium K = g = 0 =K= g thus KKthe real income growth diverges: Y P Y P (K )g = 0 > (K )g > Y P Y PDoctoral Thesis of Francesco Mureddu Essays in New Economic Geography 41. IntroductionBasics Aggl. and Growth with Endogenous Expenditure Shares Real Growth RateRegional Growth with Int. Knowledge Spillovers Regional Welfare Essays in New Economic GeographyIntroductionAgglomeration and Growth with Endogenous ExpenditureShares Basics Stability Analysis Growth RateAgglomeration, Welfare and Regional Growth withIntersectoral Knowledge Spillovers Basics Real Growth Rate Regional Welfare Doctoral Thesis of Francesco MuredduEssays in New Economic Geography 42. IntroductionBasics Aggl. and Growth with Endogenous Expenditure Shares Real Growth RateRegional Growth with Int. Knowledge Spillovers Regional WelfareReal Growth Rate in the NorthThe North enjoys two dynamical gains from agglomerationIndeed the northern real growth rate in symmetry is: (L (1 + ) ( )) ( (K ) ( 1))sym = ( 1) Instead in core-periphery the northern real growth rate is: (2L ( )) ( (K ) ( 1))cp = ( 1) Clearly the real growth rate of the North is higher incore-periphery:cp > sym Doctoral Thesis of Francesco MuredduEssays in New Economic Geography 43. IntroductionBasics Aggl. and Growth with Endogenous Expenditure Shares Real Growth RateRegional Growth with Int. Knowledge Spillovers Regional WelfareReal Growth Rate in the SouthOn the contrary the South may loose from agglomeration The southern real growth rate in symmetry is: (L (1 + ) ( )) ( ( 1) (K )) =sym ( 1) Whilst in core periphery the real growth rate becomes: (2L ( )) =cp ( 1) Hence agglomeration is welfare harming for the South if: 2 L + (L ( )) ( 1) (K ) > L ( ( 1) (K ))If spillovers are less localized ( higher) the rms location is less important therefore the dynamic gain from agglomeration is lowerDoctoral Thesis of Francesco MuredduEssays in New Economic Geography 44. IntroductionBasics Aggl. and Growth with Endogenous Expenditure Shares Real Growth RateRegional Growth with Int. Knowledge Spillovers Regional WelfareConclusions and Policy ImplicationsIn agglomeration we have dierent eects for the two regionsThe core would be better o enjoying two dynamic gains: The rst one is an increase in the growth rate of Manufacture due to the localized knowledge spillovers The second one is a decrease in the decrease in the Services price index growth due to the intersectoral knowledge spilloversInstead the periphery would experience two opposite eects: A dynamic gain given by the increase in the growth rate of Manufacture (that is imported from the core) due to the localized knowledge spillovers A dynamic loss due to the fact that southern capital does no longer grow hence the Services price is xedThis conclusion clashes with BMO (2001) who state thatagglomeration is welfare improving for both regionsDoctoral Thesis of Francesco MuredduEssays in New Economic Geography 45. IntroductionBasics Aggl. and Growth with Endogenous Expenditure Shares Real Growth RateRegional Growth with Int. Knowledge Spillovers Regional WelfareReferences (1)Andres F., (2007), quot;Divergence, Wage-Gap and Geographyquot;, Economie Internationale, 4Q, pages 83-112.Ardelean A. (2007), quot;How Strong is Love for Variety?quot;, Working Paper, Leavey School of Business, University of Santa Clara, California.Baldwin R., R. Forslid, P. Martin, G. Ottaviano and F. Robert-Nicoud (2004), quot;Economic Geography and Public Policyquot;, Princeton University Press.Baldwin R., Martin P., (2004), Agglomeration and Regional Growth, Handbook of Regional and Urban Economics, in: J. V. Henderson and J. F. Thisse (ed.), Handbook of Regional and Urban Economics, edition 1, volume 4, chapter 60, pages 2671-2711 Elsevier. Doctoral Thesis of Francesco MuredduEssays in New Economic Geography 46. IntroductionBasics Aggl. and Growth with Endogenous Expenditure Shares Real Growth RateRegional Growth with Int. Knowledge Spillovers Regional WelfareReferences (2)Baldwin R., Martin P., Ottaviano G., (2001), Global Income Divergence, Trade, and Industrialization: The Geography of Growt Take-Os, Journal of Economic Growth, Springer, vol. 6(1), pages 5-37, March.Baldwin R., Okubo T., (2006), quot;Heterogeneous rms, agglomeration and economic geography: spatial selection and sorting,quot; Journal of Economic Geography, Oxford University Press, vol. 6(3), pages 323-346, June.Baldwin R., Robert-Nicoud F., (2008), quot;Trade and growth with heterogeneous rmsquot;, Journal of International Economics, Elsevier, vol. 74(1), pages 21-34, January.Bellone F., Maupertuis M., (2003), quot;Economic Integration and Regional Income Inequalities: Competing Dynamics of Regional Wages and Innovative Capabilitiesquot;, Review of International Economics, 11, 512-526. Doctoral Thesis of Francesco MuredduEssays in New Economic Geography 47. IntroductionBasics Aggl. and Growth with Endogenous Expenditure Shares Real Growth RateRegional Growth with Int. Knowledge Spillovers Regional WelfareReferences (3)Blanchard O., Kiyotaky N., (1987), quot;Monopolistic Competition and Aggregate Demandquot;, American Economic Review, 77, 647-666.Fabio Cerina F., Pigliaru F., 2007, quot;Agglomeration and Growth: a critical assessmentquot;, in Bernard Fingleton (ed.), 2007, New Directions in Economic Geography, Edward Elgar Publishing, Cheltenham.Dixit A.K., Stiglitz J.E., (1977), quot;Monopolistic Competition and optimum product diversityquot;, American Economic Review 67, 297-308.Krugman P., (1991), Increasing Return and Economic Geography, Journal of Political Economy 99, 483-99.Doctoral Thesis of Francesco MuredduEssays in New Economic Geography 48. IntroductionBasics Aggl. and Growth with Endogenous Expenditure Shares Real Growth RateRegional Growth with Int. Knowledge Spillovers Regional WelfareReferences (4) Martin P., Rogers C., (1995), quot;Industrial location and public infrastructurequot;, Journal of International Economics, Elsevier, vol. 39(3-4), pages 335-351, November.Melitz M., (2003), quot;The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivityquot;, Econometrica, Econometric Society, vol. 71(6), pages 1695-1725, November.Ottaviano G., (1996), quot;Monopolistic competition, trade, and endogenous spatial uctuationsquot;, CEPR Discussion Paper, No. 1327.Romer P., (1990), quot;Endogenous Technological Changequot;, Journal of Political Economy 98.5, S71-S102. Doctoral Thesis of Francesco MuredduEssays in New Economic Geography