Lecture03_2019_handout.pdf - ECON280D Lecture 3 Spatial Equilibrium Models \u2013 with trade frictions Cecile Gaubert U.C Berkeley ECON280D Spring 2018 C

Lecture03_2019_handout.pdf - ECON280D Lecture 3 Spatial...

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ECON280D Lecture 3: Spatial Equilibrium Models – with trade frictions Cecile Gaubert U.C. Berkeley ECON280D. Spring 2018. C. Gaubert Lecture 3 Market Access 1 / 28
Adding geography I So far: Tools/models we have seen up to now have no geography, no distance between cities I Stylized models: either zero distance (freely traded good) or infinite distance (non traded good) I What happens in-between, for non trivial trade/transport costs? ECON280D. Spring 2018. C. Gaubert Lecture 3 Market Access 2 / 28
Krugman and the New Economic Geography I “New Economic Geography”, pioneered by Krugman. I Krugman (1980): Home market effect in International Trade I Costly trade, increasing returns at the firm level, monopolistic competition I (but labor is immobile) I Krugman (1991): “Increasing Returns and Economic Geography” I Costly trade, increasing returns at the firm level + labor mobility in manuf. I Congestion force: immobile agricultural workers (land) I Helpman (1998): “The Size of Regions” I Same production side for manuf. as in Krugman 91 I Different congestion force: housing/land instead of immobile agricultural workers I Note: Discusses the similarities with a model w/ homogenous good, no trade cost, aglgomeration externalities ECON280D. Spring 2018. C. Gaubert Lecture 3 Market Access 3 / 28
Roadmap I Redding and Sturm (AER 2008) I How important is market access for economic development? I Find strong evidence for the importance of market access based on German division/reunification I Analysis based on a spatial equilibrium framework with trade costs, i.e where distance matters I This lecture: brief overview of this class of models, before reviewing empirical results I Then: study Allen and Arkolakis (QJE 2014) in more detail. ECON280D. Spring 2018. C. Gaubert Lecture 3 Market Access 4 / 28
Spatial Equilibrium with Trade Costs Helpman(1998) - Redding and Sturm (2008) - Redding (2016) I Helpman (1998) I 2-region model I Congestion force stems from land = fixed factor (as we have seen before) I Traded sector: increasing returns to scale at firm level, monopolistic competition I Iceberg trade cost τ in from i to n : need to ship τ in y from i to get y in n I Redding and Sturm (AER 2008) add: I Arbitrary many regions ECON280D. Spring 2018. C. Gaubert Lecture 3 Market Access 5 / 28
Spatial Equilibrium with Trade Costs Helpman(1998) - Redding and Sturm (2008) - Redding (2016) I Redding (2016) “Good, Trade, Factor Mobility and Welfare” adds: I Imperfect labor mobility I Worker ω has indirect utility u i ( ω ) = u i ν i ( ω ) in city i , I ν i ( ω ) distributed Frechet (shape κ ) I In Redding (2016): I A clear exposition of this class quantitative spatial equilibrium models I A comparison of the cases with and without endogenous Krugman-type agglomeration I Adds international trade I Shows how the ACR-type welfare gains from trade change when a country is not a point on the map anymore ECON280D. Spring 2018. C. Gaubert Lecture 3 Market Access 6 / 28
Combined framework: overview I Homogenous workers I Workers consume a traded and a non traded good (housing) I Have CES preferences over varieties of the traded good I Have idiosyncratic tastes for location (Frechet) I Homogenous firms I

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