TRANSPORT COSTS, INTERMEDIATE GOODS, AND LOCALIZED GROWTH

This paper presents a dynamic, two-regional, general equilibrium model in which interregional production and trade patterns are endogenously determined. Localized growth stems from the geographical concentratio n of an industrial sector exhibiting permanent productivity increases. Geographical concentration is a result of the interaction between loc al market size and local competition in the differentiated input indus try. Regional factor endowment with an immobile factor is decisive for the long-run specialization, trade and growth patterns between the re gions if large endowment differences prevail. With equal-sized regions , multiple equilibria exist. Furthermore, we argue that integration mi ght lead to increasing regional concentration of production and innova tion.