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Putting new economic geography to the test: free-ness of trade and agglomeration in the EU regions

Steven Brakman, Harry Garretsen and Marc Schramm
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Marc Schramm: Groningen University

No 200502, CCSO Working Papers from University of Groningen, CCSO Centre for Economic Research

Abstract: Based on a new economic geography model by Puga (1999), we use the equilibrium wage equation to estimate two key structural model parameters for the NUTS II EU regions. The estimation of these parameters enables us to come up with an empirically based free-ness of trade parameter. We then confront the empirically grounded free-ness of trade parameter with the theoretical relationship between this parameter and the degree of agglomeration. This is done for two versions of our model: one in which labor is immobile between regions, and one in which labor is mobile between regions. Overall, and in line with related studies, our main finding is that agglomeration forces still have only a limited geographical reach in the EU. Agglomeration forces appear to be rather localized

Date: 2005
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