Does geographical agglomeration foster economic growth? And who gains and loses from it?

Abstract

This paper proposes a two-region model of endogenous growth, which is a natural combination of a core-periphery model à la Krugman and an endogenous growth model à la Grossman / Helpman / Romer. The innovation activity in the R&D sector involves knowledge externalities among skilled workers. Our analysis supports the idea that the additional growth spurred by agglomeration may lead to a Pareto-dominant outcome such that, when the economy moves from dispersion to agglomeration, innovation follws a much faster pace. As a consequence, even those who stay put in the periphery are better off than under dispersion, provided that the growth effect triggered by the agglomeration is strong enough.