Governmental activity, integration, and agglomeration

This paper analyzes, within a regional growth model, the impact of productive governmental policy

and integration on the spatial distribution of economic activity. Integration is understood as enhancing

territorial cooperation between the regions, and it describes the extent to which one region may benefit

from the other region's public input, e.g. the extent to which regional road networks are connected.

Both integration and the characteristics of the public input crucially affect whether agglomeration

arises and if so to which extent economic activity is concentrated: As a consequence of enhanced

integration, agglomeration is less likely to arise and concentration will be lower. Relative congestion

reinforces agglomeration, thereby increasing equilibrium concentration. Due to the congestion

externalities, the market outcome ends up in suboptimally high concentration.

Kiel Institute Expert