Agglomeration and endogenous capital

The 'new' economic geography focuses on the footloose-labour and the vertic ally linked-industries models, Both are complex since they feature demand-l inked and cost-linked agglomeration forces. I present a simpler model where agglomeration stems from demand-linked forces arising from endogenous capi tal with forward-looking agents. The model's simplicity permits many analyt ic results (rare in economic geography), Trade-cost levels that trigger cat astrophic agglomeration are identified analytically, liberalisation between almost equal-sized nations is shown to entail 'near-catastrophic' agglomer ation, and Krugman's informal stability test is shown to be equivalent to f ormal tests in a fully specified dynamic model. (C) 1999 Elsevier Science B .V. All rights reserved. JEL classification: F43; F20; F13.