Agglomeration and Endogenous Capital

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Abstract
The ‘new’ economic geography focuses on the footloose-labour and the vertically-linked industries models. Both are complex, since they feature demand-linked and cost-linked agglomeration forces. The paper presents a simpler model, where agglomeration stems from demand-linked forces arising from endogenous capital with forward-looking agents. The model’s simplicity permits many analytic results (rare in economic geography). Trade-cost levels that trigger catastrophic agglomeration are identified analytically, liberalization between almost equal-sized nations is shown to entail ‘near-catastrophic’ agglomeration, and Krugman’s informal stability test is shown to be equivalent to formal tests in a fully specified dynamic model.
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