Modeling agglomeration and dispersion in space: The role of labor migration, capital mobility and vertical linkages

• Author: Patrizio Lecca,Francesco Di Comite,d'Artis Kancs
• DOI: http://doi.org/10.1111/roie.12313
• Date: 01 August 2018
• Published date: 01 August 2018

SPECIAL ISSUE PAPER

Modeling agglomeration and dispersion in space: The

role of labor migration, capital mobility and vertical

linkages

Francesco Di Comite

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d’Artis Kancs

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Patrizio Lecca

European Commission, DG Joint

Research Centre, Calle Inca Garcilaso3,

E-41092 Sevilla, Espa~

na

Correspondence

Francesco Di Comite, European

Commission, DG Joint Research Centre,

Calle Inca Garcilaso 3, E-41092 Sevilla,

Espa~

na.

Email: francesco.di-comite@ec.europa.eu

Abstract

In this paper we investigate the role played by capital mobil-

ity, labor migration and input–output linkages in shaping the

spatial distribution of economic activity in a spatial comput-

able general equilibrium framework. We identify European

Union core and periphery regions based on an accessibility

index and simulate the impact of a homogeneous transport

shock. Our results suggest that agglomeration patterns are

magnified by labor and capital mobility, the latter exerting a

stronger influence than the former. Results are more nuanced

for vertical linkages, which are associated with more

agglomeration in terms of GDP, but more dispersion in

terms of number of firms and labor demand. These results

shed additional light on location mechanisms in applied gen-

eral equilibrium applications of the new economic

geography (NEG) theory and complement the theoretical

NEG literature based on analytically solvable models.

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INTRODUCTION

In this paper we analyze numerically the role played by capital mobility, labor migration and vertical

linkages in bringing agglomeration and dispersion of economic activities about in a spatial general

equilibrium framework. We study their impact through the lens of the effects that are well documented

in the new economic geography (NEG) literature: the market access effect, the price index effect and

the market crowding effect. Each effect contributes to a different extent to determine the spatial pat-

terns of economic outcomes. The market access effect captures the fact that firms in central regions

have better access to consumers and suppliers than firms in peripheral regions, thus pushing workers

and firms to co-locate in more central regions. The price index effect captures the impact of firms’

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C2017 The Authors Review of International Economics Published by John Wiley & Sons Ltd

Rev Int Econ. 2018;26:555–577. wileyonlinelibrary.com/journal/roie

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DOI: 10.1111/roie.12313

location and transportation costs on the cost of living of workers and the cost of intermediate inputs for

producers of final demand goods. Hence, workers would enjoy a higher level of welfare by moving to

central regions with lower prices, but the impact for firms is more nuanced because on the one hand

they can source cheaper intermediate goods but on the other hand they have to charge lower prices and

mark-ups on local consumers. Finally, the market crowding effect captures the fact that, because of

higher competition on input and output markets, firms and workers prefer to locate in peripheral

regions with fewer competitors, where they can enjoy higher market power. The disadvantage of locat-

ing in peripheral regions is that consumers and firms have to pay higher prices for goods purchased

and sourced from markets further away, but a reduction in transportation costs, e.g., owing to invest-

ment in the transport infrastructure, mitigates this effect.

Our analysis is performed using RHOMOLO, the spatial computable general equilibrium model of

the European Commission (Brandsma, Kancs, Monfort, & Rillaers, 2015). The version of RHOMOLO

used for this analysis covers 267 NUTS2 regions in the EU27 (nomenclature of territorial units for the

group of 27 countries in the European Union), which are disaggregated into six NACE Rev. 1.1 (a sta-

tistical classification of economic activities in the European Community) sectors. Our identification

strategy consists first in identifying the EU spatial core and periphery based on an index of accessibil-

ity, which is constructed from a matrix of inter-regional trade cost data. We then look at differences in

economic impacts of a homogenous and proportional improvement in accessibility between the core

and periphery under different model assumptions. Four configurations of the model are analyzed by

performing numerical simulations: (1) a model specif ication with labor mobility, capital mobility, and

vertical linkages; (2) without labor mobility; (3) without capital mobility; (4) without adjustments in

vertical linkages. Finally, we compare differences between the core and periphery in different model

settings and, based on a differences-in-differences approach, we identify the role played by each model

feature in shaping spatial patterns of regional economic outcomes.

We consider two types of accessibility shocks, one involving a homogeneous reduction in trade

barriers and the other a reduction proportional to initial values. Our analysis of a homogeneous positive

shock in the accessibility of all EU regions shows the tendency of labor mobility and, to an even larger

extent, capital mobility to foster agglomeration, both in the short and long run. In addition, capital

mobility fosters agglomeration even when the shock is proportional to the initial level of accessibility,

whereas labor mobility is associated with a dispersion of economic activities after this type of shock.

The impact of vertical linkages is more nuanced, as they are associated with a higher GDP agglomera-

tion but dispersion of firms and workers in the case of a homogeneous shock. However, the results for

vertical linkages are inverted in the case of a proportional shock, highlighting the delicate interactions

between the empirical calibration, exogenous model parameters and theoretical features of the underly-

ing NEG.

The added value of the present paper is twofold. First, it aims at drawing the attention of applied

policy modelers to the fact that, in contrast to theoretical 23232 models of the new economic geogra-

phy, real world economic outcomes in the presence of many asymmetric regions, factor endowments

and economic sectors are less predictable,

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because of a multitude of spatial interactions and competing

channels of adjustment. By performing numerical simulations and by analyzing one agglomeration/dis-

persion channel at a time, we aim to provide an accessible way of understanding the po tential pitfalls

and opportunities that a dynamic spatial general equilibrium framework offers for the policy impact

assessment. In so doing, we do not have the ambition of replicating the most important stylized facts

concerning the macroeconomic dynamics of the regions or account for stylized facts pertaining to

entry, profits, and mark-ups as for instance investigated by Bilbiie, Ghironi, and Melitz (2012). Instead,

our study attempts to measure the relative magnitude of agglomeration and dispersion forces in affect-

ing the spatial distribution of economic activity in a multi-region, multi-factor, and multi-sector

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