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Localization Economies, Vertical Organization and Trade

39 Pages Posted: 25 Jul 2000  

Gordon H. Hanson

University of California, San Diego (UCSD) - Graduate School of International Relations and Pacific Studies (IRPS); National Bureau of Economic Research (NBER)

Date Written: May 1994

Abstract

This paper develops a model of regional production networks based on localization economies. I consider an industry with two activities: one with location-specific external economies, the other with constant returns. Under autarky, localization economies imply the formation of an industry center. Agglomeration drives up wages in the center, causing the constant returns activity to disperse to outlying regions. Trade recreates the regional production network on a global scale. I apply the model to data from the Mexican apparel industry. Estimation results on Mexico's pre- and post-trade regional apparel wage structure are consistent with localization economies. Implications for the North American Free Trade Agreement (NAFTA) are discussed.

Suggested Citation

Hanson, Gordon H., Localization Economies, Vertical Organization and Trade (May 1994). NBER Working Paper No. w4744. Available at SSRN: https://ssrn.com/abstract=227006

Gordon H. Hanson (Contact Author)

University of California, San Diego (UCSD) - Graduate School of International Relations and Pacific Studies (IRPS) ( email )

9500 Gilman Drive
La Jolla, CA 92093-0519
United States

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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