Agglomeration and population aging in a two region model of exogenous growth

This article investigates common economic consequences of population aging and economic integration for agglomeration processes. We introduce demography into the New Economic Geography by generalizing the constructed capital approach to account for changes in the age structure of the population. Interestingly, the level of trade costs triggering catastrophic agglomeration is rather sensitive to changes in mortality. In particular, we find that the introduction of finite planning horizons counteracts agglomerative tendencies. This implies that, in sharp contrast to other New Economic Geography approaches, deeper integration is not necessarily associated with more interregional inequality for sufficiently high mortality rates. JEL classification: F12; F15; C61