Marshallian Theory of Regional Agglomeration

Most models of regional agglomeration are based on the NEG (New Economic Geography) model in which returns to scale are pecuniary. We investigate the implications for regional agglomeration of a "Marshallian" model in which returns to scale derive from technological externalities. Workers are assumed to have heterogeneous "home region" preferences. The model is designed to explain how "second nature" determines regional wage inequality and the regional distribution of economic activity. We show that agglomeration is not a necessary outcome of Marshallian externalities. However, if centrifugal or positive externalities are sufficiently strong relative to their centripetal or negative counterparts, the model generates multiple agglomerating equilibria. These equilibria multiply if, in addition, there are scale economies in amenities. A dynamic version of the model is developed in which external economies and inter-regional labor mobility grow over time. Regional wage inequality overshoots its long run equilibrium and, there is more agglomeration in the long run. JEL Categories: J61, O18, R11, R13