This paper develops a two-region, two-sector general
equilibriun model of location. The location of agricultural
production is fixed, but ionopolistcally competitive manufacturing
finns choose their location to maximize profits. If transportation
costs are high, returns to scale weak, and the share of spending
on manufactured goods low, the incentive to produce close to the
market leads to an equal division of manufacturing between the
regions. With lower transport costs, stronger scale economies, or
a higher manufacturing share, circular causation sets in: the more
manufacturing is located in one region, the larger that region's
share of demand, and this provides an incentive to locate still
more manufacturing there. Thus when the parameters of the economy
lie even slightly on one side of a critical "phase boundary", all
manufacturing production ends up concentrated in only one region.
*Published:
JPE, Vol. 99, no. 3 (1991): 483-499. Published as "Urban Concentration: The Role of Increasing Returns and Transport Goods", IRSR, Vol. 19, nos. 1/2 (1996): 5-30.
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