Expectations and industry location: a discrete time dynamical analysis

Anna Agliari, Pasquale Commendatore, Ilaria Foroni, Ingrid Kubin

Publikation: Wissenschaftliche FachzeitschriftOriginalbeitrag in FachzeitschriftBegutachtung


The new economic geography (NEG) aims to explain long-term patterns
in the spatial allocation of industrial activities. It stresses that endogenous economic processes may enlarge small historic differences leading to quite different regional
patterns - history matters for the long-term geographical distribution of economic
activities. A pivotal element is that productive factors move to another region whenever the anticipated remuneration is higher in that region. Given the long-term nature of
NEG analyses and the crucial role of expectations, it is astonishing that most of the existing models assume only naïve or myopic expectations. However, a recent stream of the literature in behavioral and experimental economics shows that agents often use expectational heuristics, such as trend extrapolating and trend reverting rules. We introduce such expectations formation hypotheses into a NEG model formulated in discrete time. This modification leads to a system of two nonlinear difference equations
(corresponding, in the language of dynamical systems theory, to a 2-dimensional piecewise smooth map) and thus enriches the possible dynamic patterns: with trend extrapolating (reverting) the symmetric equilibrium is less (more) stable; and it may lose stability only via a flip bifurcation (or also via a Neimark-Sacker bifurcation) giving rise to a period-doubling cascade (or also to quasi-periodic orbits). In both
cases, complex behavior is possible; multistability, that is, the coexistence of locally stable equilibria, is pervasive; and border-collision bifurcations are also allowed. In this sense, our analysis corroborates some of the basic insights of the NEG.
Seiten (von - bis)3 - 26
FachzeitschriftDecisions in Economics and Finance
PublikationsstatusVeröffentlicht - 1 Juli 2014