Scandinavian Working Papers in Economics

Working Papers,
Lund University, Department of Economics

No 2006:22: Resisting Economic Integration when Industry Location is Uncertain

Fredrik Gallo ()
Additional contact information
Fredrik Gallo: Department of Economics, Lund University, Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund, Sweden

Abstract: This paper analyses the political determination of transportation costs in a new economic geography model. In a benchmark case with certainty about where agglomeration takes place, a majority of voters favour economic integration and the resulting equilibrium is an industrialised core and a de-industrialised periphery. Allowing for uncertainty, a high level of trade costs may win the election and maintain the initial distribution of industry. The reason is that a coalition of risk-averse immobile factors of production votes for the status quo due to uncertainty about which region will attract industry if economic integration is pursued. Finally, the standard view that agglomeration is unambiguously beneficial to residents in the industrial centre is challenged by introducing costs of undertaking economic integration.

Keywords: footloose entrepreneur model; majority voting; new economic geography; regional policy

JEL-codes: F12; F15; R12

31 pages, November 16, 2006

Note: This paper replaces WP 2005:32 "Determining the Level of Transportation Costs in the Core-Periphery Model: a Majority Voting Approach"

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