City Size and the Henry George Theorem under Monopolistic Competition

We analyze the equilibrium and the optimal resource allocations in a monocentric city under monopolistic competition. Unlike the constant elasticity of substitution (CES) case, where the equilibrium markups are independent of city size, we present a variable elasticity of substitution (VES) case where the equilibrium markups fall with city size. We then show that, due to excess entry triggered by such pro-competitive effects, the "golden rule" of local public finance, i.e., the Henry George Theorem (HGT), does not hold at the second best. We finally prove, within a more general framework, that the HGT holds at the second best under monopolistic competition if and only if the second-best allocation is first-best efficient, which reduces to the CES case.City size, Henry George Theorem, monopolistic competition, first-best and second-best allocations, variable elasticity

City size and the Henry George theorem under monopolistic competition

We analyze the equilibrium and the optimal resource allocations in a monocentric city under monopolistic competition. Unlike the constant elasticity of substitution (CES) case, where the equilibrium markups are independent of the city size, we present a variable elasticity of substitution (VES) case where the equilibrium markups fall with the city size. We then show that,due to excess entry triggered by such pro-competitive effects, the 'golden rule' of local public finance, i.e., the Henry George theorem (HGT), does not hold in the second best. We finally prove, within our framework, that the HGT holds in the second best if and only if: (i) the second-best allocation is first-best efficient, which turns out to be equivalent to the CES case;or (ii) a marginal change in the city size has no impact on equilibrium product diversity at the second best.city size, Henry George theorem, monopolistic competition, first-best and second-best allocations, variable elasticity

Trade, Competition, and Efficiency

We present a general equilibrium model of monopolistic competition featuring pro-competitive effects and a competitive limit, and investigate the impact of trade on welfare and efficiency. Contrary to the constant elasticity case, in which all gains from trade are due to product diversity, our model allows for a welfare decomposition between gains from product diversity and gains from pro-competition effects. We then show that the market outcome is not efficient because too many firms operate at an inefficiently small scale by charging prices above marginal costs. Using pro-competitive effects and the competitive limit, we finally illustrate that trade raises efficiency by narrowing the gap between the equilibrium utility and the optimal utility.Pro-competitive effects, competitive limit, excess entry, trade and efficiency, monopolistic competition

Density (dis)economies in transportation: revisiting the core-periphery model

We study how density (dis)economies in interregional transportation influence location patterns in a standard new economic geography model. Density economies may well delay the occurrence of agglomeration when compared to the case without such economies, while agglomeration is both more likely and more gradual under density diseconomies than under density economies.density (dis)economies economic geography transport costs core-periphery model

Globalization and Individual Gains from Trade

We analyze the impact of globalization on individual gains from trade in a general equilibrium model of monopolistic competition featuring product diversity, pro-competitive effects and income heterogeneity between and within countries. We show that, although trade reduces markups in both countries, its impact on variety depends on their relative position in the world income distribution: product diversity in the lower income country always expands, while that in the higher income country may shrink. When the latter occurs, the richer consumers in the higher income country may lose from trade because the relative importance of variety versus quantity increases with income. We illustrate this effect using data on GDP per capita and population for 186 countries, as well as parameter estimates for domestic income distributions. Our results suggest that U.S. trade with countries of similar GDP per capita makes all agents in both countries better off, whereas trade with countries having lower GDP per capita may adversely affect up to 11% of the U.S. population.Income heterogeneity, product diversity, pro-competitive effects, general equilibrium, monopolistic competition

`Brain drain' without migration: Capital market integration and capital-skill complementarities

We analyze the impacts of capital market integration on the skill composition of labor, using a framework in which heterogeneous agents decide to invest in the acquisition of skills and where production exhibits increasing returns in the available skill range (i.e., capital-skill complementarity).

Survival of the Fittest in Cities: Agglomeration, Selection, and Polarisation

Empirical studies consistently report that labour productivity and TFP rise with city size. The reason is that cities attract the most productive agents, select the best of them, and make the selected ones even more productive via various agglomeration economies. This paper provides a microeconomically founded model of vertical city differentiation in which the latter two mechanisms (`agglomeration' and `selection') operate simultaneously. Our model is both rich and tractable enough to allow for a detailed investigation of when cities emerge, what determines their size, and how they interact through the channels of trade. We then uncover stylised facts and suggestive econometric evidence that are consistent with the most distinctive equilibrium features of our model. We show, in particular, that larger cities are both more productive and more unequal (`polarised'), that inter-city trade is associated with higher income inequalities, and that the proximity of large urban centres inhibits the development of nearby cities.entrepreneur heterogeneity, firm selection, agglomeration, income inequalities, urbanization, urban systems

Tax competition, location, and horizontal foreign direct investment

We develop a model of capital tax/subsidy competition in which imperfectly competitive firms choose both the number and the location of the plants they operate. The endogenous presence of horizontal multinationals is shown to attenuate the “race to the bottom” and yields some results that are opposite to traditional findings in the tax competition literature. First, in the presence of horizontal multinationals, increasing subsidies decrease firms' profits by exacerbating price competition due to more firms ‘going multinational’. Second, instead of being always subsidized, capital may actually be taxed in equilibrium. Third, taxes/subsidies become strategically independent policy instruments, instead of being strategic complements. Last, there may exist multiple equilibria with either low or high subsidies.capital tax competition; international trade; horizontal multinationals; foreign direct investment; imperfect competition

Transportation, freight rates, and economic geography

We investigate the role of the transport sector in structuring the location of economic activity within two-region economic geography models of the footloose capital and core-periphery types. In our setting, competitive carriers offer transport services for shipping manufactured goods across regions and freight rates are determined endogenously to clear transport markets. Each carrier commits to the maximum capacity for a round-trip and thus faces a simple logistic problem: there are costs associated with 'returning empty', and those costs increase the freight rates charged to manufacturing firms. Since demand for transport services depends on the spatial distribution of economic activity, agglomeration in one region raises freight rates to serve foreign markets, thus generating an additional dispersion force. We show that a more equal equilibrium distribution of firms prevails when freight rates are endogenously determined than when they are exogenous and that multiple equilibria (including partial agglomeration) usually coexist.transport sector, freight rates, economic geography, trade.

Do rent-seeking and interregional transfers contribute to urban primacy in sub-Saharan Africa?

We develop an economic geography model where mobile skilled workers choose to either work in a production sector or to become part of an unproductive elite. The elite sets income tax rates to maximize its own welfare by extracting rents, thereby influencing the spatial structure of the economy and changing the available range of consumption goods. We show that either unskilled labor mobility, or rent-seeking behavior, or both, are likely to favor the occurence of agglomeration and of urban primacy. In equilibrium, the elite may tax the unskilled workers but does not tax the skilled workers, and there are rural-urban transfers towards the agglomeration. The size of the elite and the magnitude of the tax burden that falls on the unskilled decrease with product differentiation and with the expenditure share for manufacturing goods. All these results are broadly in line with observed patterns of urban primacy and economic development in sub-Saharan African countries.economic geography; rent-seeking; interregional transfers; urban primacy; Sub-Saharan Africa.