Economic Geography and Wages: The Case of Indonesia
32 Pages Posted: 15 Feb 2006
Date Written: May 2004
Abstract
This paper estimates the agglomeration benefits that arise from vertical linkages between firms. The analysis is based on international trade and economic geography theory developed by Krugman and Venables (1995). We identify the agglomeration benefits off the spatial variation in firm-level nominal wages. Unusually detailed intermediate input data allow us to capture spatial input/output linkages more accurately than in previous studies. We take account of the location of input suppliers to estimate cost linkages, and the location of demand from final consumers and other firms to estimate demand linkages. The results show that the externalities that arise from demand and cost linkages are quantitatively important and highly localized. An understanding of the extent and strength of spatial linkages is crucial in shaping policies that seek to influence regional development.
Keywords: Agglomeration, vertical linkages, economic geography, cost linkages, demand linkages
JEL Classification: F1, L6, R1
Suggested Citation: Suggested Citation
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