The Rise and Fall of Regional Inequalities

Abstract

This paper studies the relationship between the degree of regional integration and regional differences in production structures and income levels. For high trade costs, industry is spread across regions to meet final consumer demand. For intermediate trade costs, increasing returns interacting with migration and/or input-output linkages between firms create a propensity for the agglomeration of increasing returns activities. When workers migrate towards locations with more firms and higher real wages, this intensifies agglomeration. When instead workers do not move across regions, at low trade costs firms become increasingly sensitive to cost differentials, leading industry to spread out again.

Relaxing Hukou: Increased labor mobility and China’s economic geography

“…However, when deriving analytical results, a Cobb-Douglas production function in agriculture is used, see Puga (1999, p. 318). 9 This is our only deviation from the standard Puga (1999) model. It is introduced to be able to take account of other reasons (human capital, sectoral structure, comparative advantage) why some regions may be able to offer higher wages than interregional differences in market access (see our discussion of equation (5) demand for each manufacturing variety from each region, implying that trade takes place between Chinese Prefectures.…”

“…It captures in a stylized way the costs of congestion associated with larger agglomerations. This presence of this additional congestion force sets Puga (1999) apart from earlier contributions by Krugman (1991) or Venables (1996).…”

“…In particular, we use a new economic geography (NEG) model (Puga, 1999) to analyse the agglomeration-labor mobility nexus for China. We argue that NEG models are particularly suited to analyse the case of rapidly industrializing economies…”

“…NEG models analyze agglomeration in terms of (changes) in the balance between spreading and agglomeration forces. 2 A feature of the NEG model in Puga (1999) that makes it particularly well-suited for our case is that in his model, the balance between these forces and hence the equilibrium spatial distribution of economic activity depends explicitly on the degree of interregional labor mobility. This makes this model a natural starting point to assess the relaxation of the Hukou restrictions on China's internal economic geography.…”

“…We adopt the NEG model by Puga (1999) as our benchmark model. This model encompasses a variety of NEG models as special cases, notably the core models by Krugman (1991), Krugman and Venables (1995) and Venables (1996).…”