Capital liberalization, industrial agglomeration and wage inequality

Li, Yao (2007): Capital liberalization, industrial agglomeration and wage inequality.

Abstract

This paper sets up a new economic geography model with diminishing marginal returns and examines the effect of capital liberalization on industrial agglomeration and wage inequality. The simulation results indicate that for the country with strict capital controls, capital liberalization can help reduce wage difference between countries in both nominal and real terms. It is also shown that when both comparative advantage and agglomeration are in effect, low trading costs does not necessarily cause the catastrophic agglomeration in the country with the larger market as most other NEG models predict.

• Item Type: MPRA Paper
• Language: English
• Keywords: New Economic Geography, Capital Liberalization, Trade Costs
• Subjects: O - Economic Development, Innovation, Technological Change, and Growth > O2 - Development Planning and Policy > O24 - Trade Policy ; Factor Movement Policy ; Foreign Exchange Policy; F - International Economics > F1 - Trade > F12 - Models of Trade with Imperfect Competition and Scale Economies ; Fragmentation; R - Urban, Rural, Regional, Real Estate, and Transportation Economics > R1 - General Regional Economics > R12 - Size and Spatial Distributions of Regional Economic Activity

References

Amiti, Mary, 2005. "Location of vertically linked industries: agglomeration versus comparative advantage," European Economic Review, Elsevier, vol. 49(4), pages 809-832.

Baldwin, Richard E., 1999. “Agglomeration and endogenous capital.” European Economic Review, 43(2), 253-280.

Baldwin, R., R. Forslid, P. Martin, G. Ottaviano and F. Robert-Nicoud, 2003. Economic Geography and Public Policy, Princeton University Press.

Davis, D.R. 1998 “The Home Market Effect, Trade and Industrial Structure.” American Economic Review, 88(5), 1264-1276.

Dixit, Avinash K and Stiglitz, Joseph E, 1977. “Monopolistic Competition and Optimum Product Diversity.” American Economic Review, 67(3), 297-308.

Ethier, Wilfred J, 1982. “National and International Returns to Scale in the Modern Theory of International Trade.” American Economic Review, 72(3), 389-405.

Forslid, Rikard, 1999. “Agglomeration with Human and Physical Capital: an Analytically Solvable Case.” CEPR Discussion Papers 2102, C.E.P.R. Discussion Papers

Fujita, Masahisa and Krugman, Paul and Venables, Anthony J. 1999. The spatial economy : cities, regions and international trade. MIT Press, Cambridge, Mass.

Harris, C.D., 1954. “The market as a factor in the localization of industry in the United States.” Annals of the Association of American Geographers, 44, 315– 348.

Henderson, J. V., and Thisse, J. 2004. Handbook of Regional and Urban Economics. volume 4. Cities and Geography. Amsterdam; San Diego and Oxford: Elsevier.

Krugman, Paul. 1991. “Increasing Returns and Economic Geography.” Journal of Political Economy, 99(3), 483-99.

Martin, Philippe & Rogers, Carol Ann, 1995. “Industrial location and public infrastructure,” Journal of International Economics, Elsevier, 39(3-4), 335-351.

Ottaviano, Gianmarco I P, 1996. “Monopolistic Competition, Trade, and Endogenous Spatial Fluctuations.” CEPR Discussion Papers 1327, C.E.P.R. Discussion Papers.

Puga, D. 1999. “The Rise and Fall of Regional Inequalities.” Europe Economic Review, 43, 303-334

Ricci, Luca, 1999. “Economic geography and comparative advantage: Agglomeration versus specialization,” European Economic Review, 43(2), 357-377

Venables, Anthony J, 1996. “Equilibrium Locations of Vertically Linked Industries.” International Economic Review, 37(2), 341-59