The core-periphery model and endogenous growth: Stabilizing and destabilizing integration

Abstract

We present a model where long-run growth and industrial location are jointly endogenous by introducing Romerian product innovation growth into Krugman's core-periphery model. We focus on stability, showing that growth is a powerful centripetal force, but that knowledge spillovers are a powerful centrifugal force. Integration policies that lower the cost of trading ideas are shown to encourage dispersion of economic activity while those that lower the cost of trading goods encourage agglomeration. Agglomeration is shown to be favourable to growth in both regions. The pro-growth effects mitigate the periphery's static welfare loss from agglomeration.