Does Geographical Agglomeration Foster Economic Growth? And Who Gains and Loses from It?

Masahisa Fujita and Jacques Thisse

The Japanese Economic Review, 2003, vol. 54, issue 2, 121-145

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. JEL Classification Numbers: F43, O18, R11

Date: 2003
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