Economic integration and agglomeration in a customs union in the presence of an outside region

Ingrid Kubin, Pasquale Commendatore, Carmelo Petraglia, Iryna Sushko

Publication: Working/Discussion PaperWU Working Paper

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New Economic Geography (NEG) models do not typically account for the
presence of regions other than the ones involved in the integration process. We explore such a
possibility in a Footloose Entrepreneur (FE) model aiming at studying the stability properties
of long-run industrial location equilibria. We consider a world economy composed by a customs
union of two regions (regions 1 and 2) and an "outside region" which can be regarded as
the rest of the world (region 3). The effects of economic integration on industrial agglomeration
within the customs union are studied under the assumption of a constant distance between
the customs union itself and the third region. The results show that higher economic integration
does not always implies the standard result of full agglomeration of FE models. This incomplete
agglomeration outcome is due to the fact that the periphery region keeps a share of
industrial activities in order to satisfy a share of "external demand". That is, the deindustrialization
process brought about by economic integration in the periphery of the union is mitigated
by the demand of consumers living in the rest of the world. In general, the market size of
the third region affects the number of the long-run equilibria, as well as their stability properties.
In addition to the standard outcomes of FE models, we describe the existence of two
asymmetric equilibria characterised by unequal distribution of firms between regions 1 and 2,
with no full agglomeration though. Interestingly, these equilibria are stable and therefore can
be regarded as a likely long-run equilibrium state of the economy.
Original languageEnglish
Place of PublicationVienna
PublisherWU Vienna University of Economics and Business
Publication statusPublished - 1 Oct 2012

Publication series

SeriesDepartment of Economics Working Paper Series

WU Working Paper Series

  • Department of Economics Working Paper Series

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