Modelling the Folk Theorem: A Spatial Cournot Model with Explicit Increasing Returns to Scale

Sylvain Barde

Studies in Economics from School of Economics, University of Kent

Abstract: This paper attempts to model directly the "folk theorem" of spatial economics, according to which increasing returns to scale are essential for understanding the geographical distributions of activity. The model uses the simple structure of most New Economic Geography papers, with two identical regions, a costlessly traded agricultural sector and a manufacturing sector subject to iceberg costs. This simple setting isolates IRS in manufacturing production function as the only potential agglomerating force. This implies that an unstable symmetric equilibrium means IRS cause agglomeration. The central result is that while a CRS manufacturing sector will always stay at the symmetric equilibrium, the presence of IRS in manufacturing causes the symmetric equilibrium to become unstable and agglomeration becomes the only long run equilibrium for the system.

Keywords: Agglomeration; increasing returns to scale; imperfect competition (search for similar items in EconPapers)
JEL-codes: F12 R10 R12 (search for similar items in EconPapers)
Date: 2007-01
New Economics Papers: this item is included in nep-geo, nep-ind and nep-ure
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