Spatial Equilibria: The Case of Two Regions

Abstract

We characterize the set of equilibria in a generalized version of the two-region economic geography model that nests the class of models in Allen and Arkolakis (2014) as well as Krugman (1991). We show that the set of (regular) equilibria corresponds to the set of zeros of a function V(x), where x is the relative price of manufacturing goods produced in the two regions. Using this approach, we provide sufficient conditions for uniqueness of equilibria that allow for positive agglomeration externalities even in the absence of congestion effects, and highlight the key role played by three additional parameters: the trade elasticity, which regulates the strength of the dispersion force associated with the decline in the terms of trade caused by migration into a region; trade costs, which weaken this dispersion force by limiting trade across regions; and the importance of the agricultural sector, which pushes against agglomeration forces in manufacturing.

Keywords: economic geography, agglomeration externalities, trade, equilibrium analysis