nep-dev New Economics Papers
on Development
Issue of 2005‒06‒05
25 papers chosen by
Jeong-Joon Lee
Towson University

  2. Child Nutrition in India in the Nineties: A Story of Increased Gender Inequality? By Tarozzi, Alessandro; Mahajan, Aprajit
  3. On the Determinants of Social Capital in Greece Compared to Countries of the European Union By Asimina Christoforou
  4. Making Capitalism Work: Social Capital and Economic Growth in Italy, 1970-1995 By Thomas P. Lyon
  5. Debt and Economic Growth in Developing and Industrial Countries By Schclarek, Alfredo
  6. On Growth and Development. By Enrico Colombatto
  7. Rapid Rise of China’s Dairy Sector: Factors Behind the Growth in Demand and Supply, The By Fuller, Frank H.; Huang, Jikun; Ma, Hengyun; Rozelle, Scott
  8. Incomes in South Africa Since the Fall of Apartheid By Murray Leibbrandt; James Levinsohn; Justin McCrary
  9. Development Strategies for Inclusive Growth in Developing Asia By Justin Lifu Lin
  10. Is China's Growth Real and Sustainable By Justin Lifu Lin
  11. Lessons of China's Transition from a Planned Economy to a Market Economy By Justin Lifu Lin
  12. Development strategy, Transition and Challenges of Development in Lagging regions By Justin Lifu Lin
  13. Impacts of Privatization on Firm Performance in China By Lingang Song; Yang Yao
  14. Cumulative Causation and Evolutionary Micro-Founded Technical Change : A Growth Model with Integrated Economies By Patrick Llerena; André Lorentz
  15. Wealth distribution, endogenous fiscal policy and growth: status-seeking implications. By Thi Kim Cuong PHAM
  16. Intergenerational Altruism, Sustainable Development and Intergenerational Equity with Heterogeneous Agents. By Alban Verchère
  17. An Empirical Test of a New Theory of Economic Growth ? the Relationship Between External Debt and Economic Development By Carolyn Currie
  18. Two Faces of Participation: The Story of Kerala By Patricia Justino
  19. Social Security in Developing Countries: Myth or Necessity? Evidence from India By Patricia Justino
  20. Shadow Economies Around the World: What Do We Know? By Friedrich Schneider; Robert Klinglmair
  21. Growth Effects of Public Expenditure on the State and Local Level: Evidence from a Sample of Rich Governments By Christoph A. Schaltegger; Benno Torgler
  22. Finance, Technology and Inequality in Economic Development By Ryo Horii; Ryoji Ohdoi; Kazuhiro Yamamoto
  23. Wealth Heterogeneity and Escape from the Poverty-Environment Trap By Masako Ikefuji; Ryo Horii
  24. Knowledge spillovers, location of industry, and endogenous growth By Kyoko Hirose; Kazuhiro Yamamoto
  25. Migration and agglomeration with knowledge By Kyoko Hirose

  1. By: Carmen Garrido Ruiz
    Abstract: Is there an aggregate technical shock? Is the growth rate of TFP a positive constant buffeted by random shocks? We use data on the Spanish economy, disaggregated by sector and region, from two different data sets to investigate the nature of technical change. Our results show that technical change is sector-specific, and operates at the national level. We also find that TFP growth rates are far from being constant. Thus, our findings contradict the basic assumption underlying the model of "Kapital, Labour and exogenous Aggregate TFP". We discuss the role of embodied technical change as a source of observed TFP growth. We also find no role for “broad externalities” as a determinant of TFP growth.
    Date: 2005–05
  2. By: Tarozzi, Alessandro; Mahajan, Aprajit
    Abstract: We establish some new interesting stylized facts on the changes in boy versus girl nutritional status in India during the nineties, a period of rapid economic growth. Our analysis is based on the comparison, over time and across genders, of the distribution of z-scores calculated for height and weight measures. Overall, we find that child nutrition improved substantially, but we also find that gender differences in nutritional status increased as well, with nutritional status improving substantially more for boys than for girls. Consistent with a large literature that shows the existence of a steep North-South gradient in gender inequality in India, we find that changes in nutritional status appear to be much more similar between genders in the South. We also estimate predicted changes in nutritional status based on changes in the distribution of household wealth (proxied by asset ownership) and a few other observed household characteristics. Actual changes appear to be relatively close to predicted ones in urban areas. For children living in the rural sector the results are more mixed, and we observe that actual changes in weight are quite larger than predicted ones for boys, while they are much worse than the predicted ones for girl height. We also estimate that the predicted changes are generally larger for boys than for girls.
    Keywords: Child Nutrition, India, Child Anthropometry
    JEL: I12 J13 O53
    Date: 2005
  3. By: Asimina Christoforou (Athens University of Economics and Business)
    Abstract: Social capital refers to the stock of social relations, based on norms and networks of cooperation and trust that spill over to the market and state to enhance collective action between actors and achieve improved social efficiency and economic growth. The aim of the present paper is to discuss the implications of contemporary literature and empirical findings on social capital for the growth prospects of Greece, compared to the member-states of the European Union. In order to examine the potential of social capital to enhance growth, we must look into the factors that determine the nature and context of trust, norms and networks that have emerged in our multinational, multiethnic and multicultural Europe.The contribution of this paper is to offer insight on the determinants of social capital in Greece, compared to the European Union (EU - former 15 member-states). For this purpose, we regress an index of individual group membership, derived from the European Community Household Panel (ECHP), on a set of individual as well as aggregate factors of social capital. Regression results provide evidence of the impact of both individual and institutional characteristics on group membership. Differences on the extent of group membership between countries might be indicative of the historical and cultural differences that have affected the evolution of social capital across Europe. Particularly in Greece, the relatively low level of group membership compared to the other EU countries might provide further evidence of its low levels of civicness. Historically, its weak civil society has been a result of a prior civic tradition of clientelism under arbitrary rule, the interference of special-interest groups and the lack of credibility and impartiality from the part of the state. And these factors might be responsible for the slow pace in reform and growth observed compared to the rest of the EU. Nevertheless, the findings on the determinants of social capital may direct us to possible means of rebuilding patterns of participatory and cooperative behavior, especially in countries with low levels of trust and civicness, such as Greece.
    Keywords: Determinants, Social capital in Greece, European union, Diversity
    Date: 2005–05
  4. By: Thomas P. Lyon (Indiana University)
    Abstract: Using data on the 20 Italian regions for the period 1970-1995, I examine whether the presence of social capital, as reflected in a number of different measures collected by Putnam (1993), affects economic productivity. I find three types of effects. First, social capital, when treated as an input to regional production, has a positive and significant effect in the South, but a much weaker effect in the North. Second, some forms of social capital can significantly increase regions’ propensities to make physical capital investments; however, dense networks of association reduce capital investment in both the North and South. Instrumental variables estimates show that social capital affects growth both directly and through affecting investment in physical capital. Third, social capital contributes positively to the rate of total factor productivity growth in the Italian regions.
    Keywords: Social capital, Growth, Investment, Italy
    JEL: O17 O47 O52
    Date: 2005–05
  5. By: Schclarek, Alfredo (Department of Economics, Lund University)
    Abstract: This paper empirically explores the relationship between debt and growth for a number of developing and industrial economies. For developing countries, we find that lower total external debt levels are associated with higher growth rates, and that this negative relationship is driven by the incidence of public external debt, and not by private external debt. Regarding the channels through which debt accumulation affects growth, we find that this is mainly driven by the capital accumulation growth. There is only limited evidence on the relationship between external debt and total factor productivity growth. In addition, for private savings rates there are mixed results. We do not find any support for an inverted-U shape relationship between external debt and growth. For industrial countries, we do not find any significant relationship between gross government debt and economic growth.
    Keywords: External Debt; Public debt; Economic Growth; Capital Accumulation; Productivity Growth; Private Savings
    JEL: F34 H63 O10 O40
    Date: 2004–12–04
  6. By: Enrico Colombatto
    Abstract: Contrary to the mainstream view, the paper offers a subjectivist approach to growth and an institutional view of development. In particular, the term development regards the prevailing rules of the game and their effects on the key variables for economic activity to take off: property rights and entrepreneurship. And growth is deemed to be the result of favourable institutional environments where chances are exploited and individuals succeed in improving their living conditions. From a methodological standpoint it is then argued that the common attempts to measure growth provide at best crude evaluations of the efforts to acquire purchasing power, but hardly measure well-being. From a normative perspective, the role of growth-enhancing government intervention is thus questioned. Doubts are also raised with respect to the recent and increasing literature on institutional design, which seems to ignore much of the lessons taught by the institutional schools - both old and new. And which tends to describe the past, rather than providing explanations that might help us understand the future.
    Date: 2005–04
  7. By: Fuller, Frank H.; Huang, Jikun; Ma, Hengyun; Rozelle, Scott
    Abstract: With the rapid growth in China’s dairy industry, a number of recent papers have addressed either the supply or the demand trends for dairy products in China. None, however, presents a systematic explanation for the recent growth in both the supply and demand for dairy products. The goal of this paper is to sketch a more comprehensive picture of China’s dairy sector and to assess the nature of the sector’s development in the coming decades. Drawing upon several empirical studies, we examine the trends in dairy product consumption to create a composite picture of the factors underlying the recent growth. We also empirically investigate the sources of production gains in milk supply and assess the relative importance of expanding herd size, changes in the nature of production, technological change, and improvements in efficiency to the overall growth of milk production.
    Date: 2005–05–27
  8. By: Murray Leibbrandt; James Levinsohn; Justin McCrary
    Abstract: This paper examines changes in individual real incomes in South Africa between 1995 and 2000. We document substantial declines--on the order of 40%--in real incomes for both men and women. The brunt of the income decline appears to have been shouldered by the young and the non-white. We argue that changes in respondent attributes are insufficient to explain this decline. For most groups, a (conservative) correction for selection into income recipiency explains some, but not all, of the income decline. For other groups, selection is a potential explanation for the income decline. Perhaps the most persuasive explanation of the evidence is substantial economic restructuring of the South African economy in which wages are not bid up to keep pace with price changes due to a differentially slack labor market.
    JEL: F0 O1 O5
    Date: 2005–05
  9. By: Justin Lifu Lin (China Center for Economic Research)
    Abstract: In this paper, I would like to argue that for the countries in developing Asia, like developing countries in other parts of the world, if their governments adopt a right development strategy, they have good opportunities to achieve dynamic growth and equitable income distribution in their process of development. However, many of them followed an inappropriate strategy and impeded their opportunities to realize this growth potential. I would also like to propose an approach for the developing countries to transit from the old to the new development strategy smoothly.
    Keywords: developing countries, developing Asia, development strategy
    JEL: O11 O20 O4
    Date: 2004–10
  10. By: Justin Lifu Lin (China Center for Economic Research)
    Abstract: Since the reform of 1978, China's overall economic performance has been remarkable. The average annual GDP growth rate reached 9.4% in 1978-2002. However, in the last few years, China's economic growth rate has been questioned. A deflation was evident at the end of 1997. In spite of the Chinese government's many efforts, the deflation has continued. A deflation in an economy in general accompanied by stagnation or slow GDP growth. However, China's GDP growth rate reached 7.8% annually during the deflation period in 1998-2002, which was the fastest growth rate in the world. Moreover, the energy consumption dropped in 1998 and 1999. The abnormality prompted some economists to question the reliability of China's statistics. In the paper, the author will analyze why it is possible for china to maintain high growth with reduction of energy consumption during the deflation period and suggest the way for China to absorb excess capacity and get out of the deflation. The author will also discuss the prospect for China's long-term growth.
    Keywords: China, growth, inflation, deflation, GDP, stagnation
    JEL: E31 E43 O4
    Date: 2004–02
  11. By: Justin Lifu Lin (China Center for Economic Research)
    Abstract: One of the most important events in the modern economic history is the socialist countries' transition from the Soviet-type planned economy to a market economy starting in the last two decades of the 20th Century. China's experience of transition has produced many interesting contrasts to the experience of transition in Eastern Europe and Former Soviet Union (EEFSU). When the transition started in EEFSU, most economists in the West favoured a big bang approach, which included stabilization, price liberalization, and privatization. They considered these three reforms to be necessary for a successful transition to a market economy and attempted to complete all these reforms simultaneously or in a short sequence. The big bang approach in essence is a version of the Washington Consensus, which is based on the basic principles of neoclassical economies for a well-functioning market economy and was recommended by the IMF/World Bank for market-orientated reforms in the developing countries. The proponents of big bang approach expected the transition in EEFSU to have a "J-Curve" effect on economic growth; that is, they expected the GDP in a country that implemented the big bang approach to decline initially and to be followed by a strong recovery in a short period of time. Most countries in EEFSU followed this approach. The big bang approach, nevertheless, has resulted in an unexpected sharp and prolonged decline in GDP with extraordinarily high inflation rates and serious deterioration of other social indicators.
    Keywords: China, transition, stabilization, price liberalization, privatization, GDP
    JEL: O11 O16 O18
    Date: 2004–02
  12. By: Justin Lifu Lin (China Center for Economic Research)
    Abstract: In this paper, we argue that the poor growth performance and many institutional distortions in the LDCs after the World War II can be explained by heir adoption of an inappropriate development strategy.. Motivated by nation building, most LDCs, including the socialist countries, adopted a comparative-advantage defying (CAD) strategy to accelerate the growth of capital-intensive, advanced sectors in their countries. Many firms in those prioritised sectors were nonviable in open, competitive markets because of the violation of their economies' comparative advantages. For implementing CAD strategy, the governments in the LDCs adopted a series of distortions in input and output markets to subsidize/ protect the nonviable firms, resulting in rent seeking, soft-budget constraint, macroeconomic instability, and income disparities. Economic stagnation or even sudden collapse becomes unavoidable, prompting the LDCs, voluntarily or involuntarily, to start a market-orientated reform. Without addressing first the firm's' viability issue, the implementation of market-orientated reforms might result in widespread bankruptcies, unemployment, and social/ political instability. For fear of the above dreadful consequences, many governments found other disguised ways to the above dreadful consequences, many governments found other disguised ways to protect/ subsidize those nonviable firms after implementing the reform. In either case, not only the transition to a well-functioning market economy could not be achieved but also the economic performance became poorer than that before the reform.
    Keywords: protect, subsidize, LDCs, comparative-advantage defying, CAD, reform
    JEL: O11 O16 F13
    Date: 2004–02
  13. By: Lingang Song (Australia–Japan Research Centre); Yang Yao (China Center for Economic Research)
    Abstract: This paper studies the impact of privatization on firm performance in China. Using a unique dataset, we are able to control the selection biases of privatization and handle the missing variable problem that are frequently encountered in the transition economies literature. Privatization is found to have a significantly positive impact in firm profitability, but a weak or no significant impact on unit cost and labor productivity. Clear time trends are found for the effect of privatization. Firms with medium length of privatization and firms in the period 1997-1999 are found to have more robust effects.
    Keywords: privatization, transition economies, Chinese economy
    JEL: L25 P27 P31
    Date: 2004–07
  14. By: Patrick Llerena; André Lorentz
    Abstract: We propose to develop in this paper an alternative approach to the New Growth Theory to analyse growth rate divergence among integrated economies. The model presented here considers economic growth as a disequilibrium process. It introduces in a cumulative causation framework, micro-founded process of technical change taking into account elements rooted in evolutionary and Neo-Austrian literature. We then attempt to open the ‘Kaldor-Verdoorn law black-box’ using a micro-level modelling of industrial dynamics. We use this framework to study the nature and sources of growth rate divergence, focusing on the effect of some macro-economic parameters (income elasticities) and of some technological parameters (technological opportunities and absorptive capacities). If the results remain broadly in Kaldorian lines, this framework allows for more subtle considerations of growth rate divergence.
    Date: 2004
  15. By: Thi Kim Cuong PHAM
    Abstract: We investigate the wealth distribution and endogenous fiscal policy in a two-classes growth model in which individuals exhibit a desire for social status. The latter is in- creasing with individual wealth and decreasing with the average level of the society. First, we show that status seeking is crucial in determining the long-run wealth dis- tribution: agents with stronger status motive end up holding a higher level of wealth. Second, a higher inequality can be associated with a higher growth if it is due to a stronger incentive to accumulate wealth of one class of agents. Third, the model implies that a higher growth rate may reduce welfare of one class of agents and raise welfare of the other one. Finally, when fiscal policy is determined through a voting mechanism, an increase in the strength of status motive of majoritarian class may lead to a reduced political equilibrium growth.
    Keywords: Individual welfare; endogenous growth; endogenous Þscal policy; status seeking; wealth distribution
    JEL: D31 H31 H50 O41
    Date: 2004
  16. By: Alban Verchère
    Abstract: In this article, we study the question of intergenerational equity in a framework that displays two kinds of agents distinguished by their non dynastic intergenerational altruism. The more altruist agents regarding the transmitted environment are qualified of ecologists, whereas the others, less altruists, are then qualified of consumerists. This heterogeneity integrated in a sustainable development model leads to a rather counter-intuitive or paradoxical result as compared with the homogeneous agents case: environmental quality and utility of each group equally record a U-shape evolution, but the favorable u-turn intervenes later in the heterogeneous case than when only consumerists (or less altruist agents) compound the economy. Interpreting this result in terms of free-riding give us the opportunity to reinterpret the question of intergenerational inequity that would have been excluded in a model with only one kind of altruist agents.
    Keywords: Intergenerational Altruism, Heterogeneity, Sustainable Development, Intergenerational Equity.
    JEL: O13 Q20
    Date: 2004
  17. By: Carolyn Currie (School of Finance and Economics, University of Technology, Sydney)
    Abstract: Analyses of the nature of debt relying on the theory of rational expectations conclude that the burden of public debt need not fall on future generations if the present generation anticipates the higher taxes needed in the future for debt servicing. However, there have been many instances where increases in budget deficits have been followed by a decrease in the savings propensity of the private sector. Foreign exchange earnings also have to be set aside. It appears that the main problem for countries in an early stage of economic development, is that often the borrowings have not been productively employed so that a national debt crises results. Foreign lenders become increasingly reluctant to lend further amounts to a country, which has been a net capital importer. This paper puts forward a methodology of testing a new theory of economic growth that emphasises key factors determining the success or failure of policies that change underlying economic structures, and hence would lead to an intrinsic monitoring of ?over-borrowing?.
    Keywords: economic growth; debt burden; regulation; ownership structures
    JEL: L33 O11 O38 O47 P11 P52
    Date: 2005–05–01
  18. By: Patricia Justino (Poverty Research Unit at Sussex, Department of Economics, University of Sussex)
    Abstract: This paper analysis the impact of collective action and political participation on the economic development of the south Indian state of Kerala over the last three decades. Despite its low economic basis, Kerala’s successive governments have implemented a large redistributive programme that resulted in impressive levels of social development. Kerala’s success has been largely attributed to the actions of organised collective movements, both in the formal and informal sectors, in the form of militant peasants associations and labour unions. Collective actions have, however, also contributed towards political instability, increase in the risk of investment and uncertainty in labour productivity. This paper examines the effects of collective actions on Kerala’s economic growth during the last three decades using time-series analysis techniques, considering in turn collective action and redistributive policies to be external and then endogenous variables to the process of economic growth in Kerala. The results show that while some forms of collective action can contribute towards the decrease of poverty and increase in state income, other forms harm economic growth. We compare these results with those obtained for a panel of 14 major Indian states.
    Keywords: Redistribution, industrial disputes, collective action, participation, social development, economic growth, Kerala, India
    JEL: O1 O5
    Date: 2003–09
  19. By: Patricia Justino (Poverty Research Unit at Sussex, Department of Economics, University of Sussex)
    Abstract: This paper discusses the importance of social security policies in developing economies, using empirical evidence from India. The paper discusses the viability of implementing systems of social protection in developing countries and provides an empirical analysis of the effects of socio-economic security policies on Indian’s economic performance between 1973 and 1999, using a two-stage least square model adapted to data from a panel of 14 Indian states. The results show that policies that strengthen the social and economic security of the Indian population have been an important endogenous variable to both the reduction of poverty and the economic growth in India.
    Keywords: Social security, social protection, economic growth, India, simultaneous equation models, panel data
    JEL: C33 H50 I38 O10 O40 O53
    Date: 2003–09
  20. By: Friedrich Schneider; Robert Klinglmair
    Abstract: Using various statistical procedures, estimates about the size of the shadow economy in 110 developing, transition and OECD countries are presented. The average size of the shadow economy (in percent of official GDP) over 1999-2000 in developing countries is 41%, in transition countries 38% and in OECD countries 18.0%. An increasing burden of taxation and social security contributions combined with rising state regulatory activities are the driving forces for the growth and size of the shadow economy. If the shadow economy increases by one percent the annual growth rate of the “official” GDP of a developing country (of a industrialized and/or transition country) decreases by 0.6% (increases by 0.8 and 1.0 respectively).
    Keywords: shadow economy; interaction of the shadow economy with the official one; tax burden
    JEL: O17 O5 D78 H2 H11 H26
    Date: 2004–01
  21. By: Christoph A. Schaltegger; Benno Torgler
    Abstract: There is a vast empirical literature investigating the relationship between government size and economic growth. But the empirical evidence of growth effects of public expenditure using cross-country regres-sions is still inconclusive. According to a number of authors this is not surprising since the negative rela-tionship only applies for rich countries with a large public sector. Restricting their analysis on rich coun-tries only they can show the predicted negative impact. Naturally, a selection of a sub-sample of rich countries is always somewhat arbitrary. Another possibility is to concentrate on governments within a rich country. However, only few studies investigate the effect of state and local spending on economic growth. This paper concentrates on the relationship between public expenditure and economic growth within a rich country using the full sample of state and local governments from Switzerland over the 1981-2001 period. The general finding is a fairly robust negative relationship between government size and economic growth. However, in contrast to public spending from operating budgets there is no significant impact on economic growth by expenditure from capital budgets.
    Keywords: Economic Growth; Government expenditure; Public Sector
    JEL: E62 H20 O23
    Date: 2004–07
  22. By: Ryo Horii (Graduate School of Economics, Osaka University); Ryoji Ohdoi (Graduate School of Economics, Osaka University); Kazuhiro Yamamoto (Graduate School of Economics, Osaka University)
    Abstract: This paper develops an overlapping generations model with technology choice and imperfect credit market, in order to investigate a possible source of underdevelopment. Consistent with empirical observations in the literature, the model shows that better financial institutions that provide stronger enforceability of contracts facilitate the development of financial markets, which in turn enables firms to switch to more capital intensive technologies, thereby promoting economic development. In the presence of credit rationing, however, this technological switch widens inequality. Therefore, risk-averse agents would not be willing to improve the financial institutions to the level at whic the technological switch occurs, resulting in a development trap. A remedy is to facilitate small firmsfadoption of existing technology, rather than the newone.
    Keywords: Enforceability of Contracts; Technological Switch; Income Distribution, Credit Rationing, Development Trap.
    JEL: O14 O16
    Date: 2005–04
  23. By: Masako Ikefuji (Graduate School of Economics, Osaka University); Ryo Horii (Graduate School of Economics, Osaka University)
    Abstract: A mutual link between poverty and environmental degradation is examined in an overlapping generations model with environmental externality, human capital, and credit constraints. Environmental quality affects labor productivity and thus wealth dynamics, whereas wealth distribution determines the degree to which agents rely upon natural resources and therefore the evolution of environmental quality. This interaction creates a epoverty-environment trap,' where a deteriorated environment lowers income, which in turn accelerates environmental degradation. We show that greater wealth heterogeneity is the key to escaping the poverty-environment trap, although it has negative effects both on the environment and output when not in the trap.
    Keywords: Poverty trap, Environmental degradation, Wealth distribution, Human capital.
    JEL: O11 O13 O15
    Date: 2005–05
  24. By: Kyoko Hirose (Graduate School of Economics, Osaka University); Kazuhiro Yamamoto (Graduate School of Economics, Osaka University)
    Abstract: A Grossman-Helpman-Romer-type endogenous-growth model is developed in this study. This model has two countries in which there are knowledge spillovers that are partially local. Owing to these spillovers, innovation cost in a particular country decreases as the number of firms locating in both that country and the other country increases. If international knowledge spillovers are symmetric, innovation cost is lower in the country that has the larger market. However, if a small-market country can absorb the international knowledge spillovers better than a large-market country, the innovation cost may be lower in the small-market country. When the innovation cost is lower in the country that has a large market, the growth rate increases with agglomeration, which is generated by a reduction in the transportation costs. However, when the innovation cost is lower in the country that has a small market, the growth rate decreases with the reduction in the transportation costs.
    Keywords: knowledge spillovers, growth rate, transportation costs, market scale
    JEL: F43 O30 R12
    Date: 2005–06
  25. By: Kyoko Hirose (Graduate School of Economics, Osaka University)
    Abstract: In this paper, a Grossman-Helpman-Romer-type endogenous growth model is developed with two regions in which there are mobile workers and linkage between consumption goods and differentiated intermediate goods. The economy has the potential to reach the following spatial configuration: full agglomeration, partial agglomeration, and segmented agglomeration. In perfect agglomeration, the innovation sector and intermediate goods sector agglomerate in one region. In partial agglomeration, intermediate goods firms partially agglomerate in the region where the innovation sector agglomerates perfectly. In segmented agglomeration, the innovation sector agglomerates in the region where both intermediate goods sector and final good sector do not agglomerate perfectly. In addition, we show the comparison of the welfare of skilled workers in each steady state. Not surprisingly, the welfare of the skilled in full agglomeration is always the highest. However, even though there are transportation costs of final good, the welfare in segmented agglomeration is not necessarily the lowest.
    Keywords: knowledge spillovers, transportation costs, inter-regional trade
    JEL: F43 O18 R11
    Date: 2005–06

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