Behrens regional economics a new economic geography.pdf

Regional Science and Urban Economics 37 (2007) 457 – 465

www.elsevier.com/locate/regec

Regional economics: A new economic

geography perspective ☆

⁎

Kristian Behrens a , Jacques-François Thisse a,b,c,

a CORE, Université Catholique de Louvain, Belgium

b CERAS, Ecole Nationale des Ponts et Chaussées, France

c CEPR, United Kingdom

Received 5 August 2006; accepted 19 October 2006

Available online 12 April 2007

Abstract

We show that the concepts and tools developed in new economic geography may be used to revisit several

problems in regional economics. In particular, we want to stress the following two points: (i) what do we mean

by a region and (ii) what kind of interactions between regions do we want to study and how to model them? We

conclude by discussing a few open problems that should be explored in more detail for regional economics to

become a richer body of knowledge.

JEL classification: R1

Keywords: Regions; Regional economics; New economic geography

1. Introduction

This journal has been launched in 1972 under the title Regional and Urban Economics, which

is almost the name of the JEL-classification entry R. The first point we wish to make is that, by the

time this journal was launched, urban economics was already a well-established field drawing on

new concepts and tools. By contrast, the scientific status of regional economics was less clear in

☆ We thank a referee, Richard Arnott, Wilfried Koch and Giordano Mion for helpful comments and suggestions. Kristian

Behrens gratefully acknowledges financial support from the European Commission under the Marie Curie Fellowship

MEIF-CT-2005-024266.

⁎ Corresponding author. CERAS, Ecole Nationale des Ponts et Chaussées, France.

E-mail addresses: behrens@core.ucl.ac.be (K. Behrens), thisse@core.ucl.ac.be (J.-F. Thisse).

doi: 10.1016/j.regsciurbeco.2006.10.001

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K. Behrens, J.-F. Thisse / Regional Science and Urban Economics 37 (2007) 457 – 465

that regional concepts, models and techniques were too often a mere extension of those used at the

national level, with an additional index identifying the different regions (see, e.g., interregional

input

Domar model of regional growth). 1 The Samuelsonian

emphasis put on trade theory also acted as an impediment to the further development of regional

economics, the trade of goods being viewed as a substitute to the mobility of factors. Today,

thanks to the surge of new economic geography (in short, NEG), it is time to re-think regional

economics. This is what we wish to do in this note.

It is worth stressing from the outset that, in order to talk even halfway sensibly about regional

economics, it is necessary to tackle the following two questions: (i) what do we mean by a region;

and (ii) what kind of interactions between regions do we want to study and how to model them?

Regarding the first question, we find it crucial to develop a better understanding of how the

spatial scale of the analysis matters for the economic results. Too often, economists use

interchangeably different, yet equally unclear, words such as locations, regions or places without

being aware that they often correspond to different spatial units. In doing so, they run the risk of

drawing implications that are valid at a certain level of spatial aggregation but not at another. 2

Furthermore, using vague definitions of the spatial unit of analysis reduces the scientific contents

of the theory in the Popperian sense, as the empirical results can always be contested in light of the

theory on the sole basis that variables are not measured at the appropriate spatial scale.

As to the second question, regardless of what is meant by a region, the concept is useful if and

only if a region is part of a broader network through which various types of interactions occur.

Without taking this aspect into account, one may wonder what the difference between regional

economics and the macroeconomics of a closed economy would be. When there is a single region,

the economy is a-spatial and there is nothing interesting to be said in terms of spatial analysis.

Hence, any meaningful discussion of regional issues requires at least two regions in which

economic decisions are made. Furthermore, if we do not want the analysis to be confined to trade

theory, we must also account explicitly for the mobility of agents

–

output matrices or the Harrod

–

well as for the existence of transport costs, which are the two main ingredients of location theory.

In the first two sections, we briefly review what we know and do not know about those two

questions. We conclude in Section 4 by discussing a few open problems that should be explored in

more detail for regional economics to reach the level of generality one expects for such an

important field.

–

firms and/or consumers

–

2. What is a region?

Since the early days of regional economics, there have been many definitions for and approaches

to the concept of a region, Lösch (1938) being probably the most stimulating contribution. In its

broadest sense, the term

is used to describe a bundle of places such that any two places

belonging to the same region are, in a way or another, similar. Yet, the multiplicity of definitions

reflects the fact that the concept of similarity to be used does not suggest itself. This difficulty may be

formalized in a very rigorous, but largely unnoticed, way.

Observe first that a set of regions always involves a partition of some geographical space that

contains a

“

region

”

“

large

”

number of places

—

a place being the elementary spatial unit. Keeping this in

1 A noticeable exception is the work of Takayama and Judge (1971), which has led to a large body of extensions and

real-world applications.

2 For example, Rosenthal and Strange (2001) show that the nature of agglomeration forces differs depending on the

spatial scale of the analysis (zipcode, county level, state level).

K. Behrens, J.-F. Thisse / Regional Science and Urban Economics 37 (2007) 457 – 465

459

mind, a well-known result in set theory is that there is a one-to-one correspondence between the

family of partitions in a set and the family of equivalence relations of the same set ( Halmos, 1965 ).

Recall that an equivalence relation in a set is a reflexive, symmetric and transitive relation.

Intuitively, one may think of an equivalence relation as a generalization of the concept of equality

to that of similarity: (i) an object is always similar to itself (reflexivity); (ii) if one object is similar to

another, the latter is similar to the former (symmetry); and (iii) two objects similar to a third one are

themselves similar (transitivity).

Accordingly, using a particular regional system amounts to working with a special equivalence

relation defined on the space of reference. This result has two important implications: (i) any place

belongs to a single region and (ii) two places belonging to the same region are considered as being

identical from the standpoint of the equivalence relation, whereas two places belonging to two distinct

regions are not. It is now easy to understand why there is no general agreement on what a region should

be: the number of equivalence relations that can be defined in a space is

. Thus, depending on

the point of view selected by the analyst, the regional system, whence the shape and number of

regions, may vary. Consequently, a given area cannot be considered as a region per se. Whether or not

it is part of a regional system ultimately depends on the equivalence relation that is being used.

This difficulty should not come as a surprise as defining a regional system bears some

resemblance with the problem of aggregation in economic theory. In this respect, it is well known

how poorly representative the so-called

“

huge

”

“

representative consumer

”

may be ( Kirman, 1992 ).

Likewise, the word

is still in search of a well-defined theoretical meaning ( Triffin,

1940 ). Grouping locations within the same spatial entity, called a region, gives rise to similar

difficulties. It is, therefore, probably hopeless to give a clear and precise answer to our first

question, which is essentially an empirical one. When we talk about a region, we must be happy

with the same theoretical vagueness that we encounter when using the concept of industry. Note

that both involve some

“

industry

”

level of aggregation between the macro and the micro.

It should be clear from the foregoing discussion that the main challenge in defining a regional

system lies more in the empirical application one has in mind. From a purely empirical point of

view, the concept of region one retains is often intrinsically linked to the availability of data.

Hence, the question of the spatial scale of analysis, though already problematic in theory,

becomes even more dramatic in applied research. However, such a difficulty does not dispense the

analyst from seeking meaningful empirical solutions (see, e.g. Magrini, 2004; McMillen and

Smith, 2003 ). On the one hand, the question of the size of regions no longer matters because it is

often dictated by administrative classifications (e.g., the NUTS regional classification of the EU).

On the other hand, one is tempted to twist theory so that it fits into the available statistical

classifications. One additional problem is that, due to the nature of the data available, space must

often be represented by a discrete set of points. Yet, when there are too many points, aggregation

becomes necessary and gives rise to another problem, known as the MAUP (Movable Areal Unit

Problem). 3 Some new techniques should alleviate the MAUP problem. In particular, the use of

geographical information systems and the increasing availability of micro-spatial data should

allow for less reliance on arbitrarily determined regional boundaries. 4

“

intermediate

”

3 Economists and geographers do not seem to be aware that mathematicians have extensively studied the possible errors

that may emerge from the aggregation of data. In this perspective, Francis et al. (2007) consider and compare various

aggregation error measures, identify some effective (and some ineffective) aggregation error measures, and discuss some

open research areas.

4 For example, Duranton and Overman (2005) start from a continuous space approach to determine the degree of spatial

concentration of various industrial sectors, whereas Mori et al. (2005) propose an index of industrial location that can be

decomposed into components representing localization at various levels of spatial aggregation.

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K. Behrens, J.-F. Thisse / Regional Science and Urban Economics 37 (2007) 457 – 465

3. The relationship between regional economics and NEG

The idea of spatial interaction is central to regional economics. Broadly defined, spatial

interaction refers to a wide array of flows subject to various types of spatial frictions, such as

traded goods, migrations, capital movements, interregional grants, remittances, and the

interregional transmission of knowledge and business cycle effects. So far, the bulk of NEG

has been restricted to the movements of goods and of some agents only.

As argued in the foregoing section, defining clearly and delineating precisely a region appears

to be a difficult, not to say impossible, task. Keeping this in mind, we assume from now on that

regions may be viewed as units where economic activity takes place. In light of this (vague)

definition, it becomes crucial for the analysis to account for the fact that where things happen is

endogenously determined in a regional system. In this respect, traditional regional economics

often fails to grasp such an issue by taking the location of production factors as given, very much

as in trade theory.

How can (or should) a regional system be formally represented is still a matter of debate.

Firstly, one may consider that there is a discrete set of regions. Alternatively, one may assume that

there is a continuum of regions. Although the second approach may seem more appropriate when

we want to work at a very disaggregate spatial level, it seems natural to think of a regional system

as being formed by a finite set of regions. Furthermore, NEG shows that even when location

spaces are continuous, economic activity usually clusters into a few places. 5 This leads us to

believe that the operationally feasible and theoretically desirable representation of a regional

system is in terms of a graph. Note that this is the approach that has been chosen for a long time in

location theory ( Beckmann and Thisse, 1986 ). Indeed, graphs offer a natural representation of

finite systems of agents/nodes which interact with each other through links. It also fits well the

intermediate spatial scale considered in regional economics.

In a spatial economy with a finite number of regions, we know from Starrett's Spatial

Impossibility Theorem that the competitive market mechanism breaks down when the mobility of

firms and/or households is combined with the transport costs of goods between regions. Hence,

unless strong spatial heterogeneities are assumed to be given a priori, the question of where

economic activity occurs and why cannot be readily addressed within the competitive framework.

As argued by Krugman (1995) , this probably explains why spatial economic issues have been for

so long at the periphery of mainstream economics. Note, in passing, that a major implication of

the Spatial Impossibility Theorem is that some forms of imperfect competition are likely to be

necessary to handle regional issues. It is no surprise, therefore, that the surge of NEG took place a

few years after the revival of monopolistic competition and industrial organization, from which

NEG borrows many ideas and concepts.

Since the pioneering work of Krugman (1991) , NEG has become a fast-growing field ( Fujita

et al., 1999; Baldwin et al., 2003; Ottaviano and Thisse, 2004 ). It provides a full-fledged general

equilibrium approach with strong microeconomic underpinnings in which regional disparities

may or may not emerge endogenously, depending on the values of some structural parameters. In

this respect, it seems fair to say that NEG is the first successful attempt made to explain why

5 To be sure, the initial strategy used in NEG was in terms of two regions. However, later developments have shown

that the basic ideas remain applicable to continuous space models (see, e.g. Fujita et al., 1999; Picard and Tabuchi, 2003 ).

In this context, a precise definition of a region is not really needed since regions appear endogenously as clusters of

activities. In such a context, regions become even more of a relative concept because they are subject to changes in the

economic environment.

K. Behrens, J.-F. Thisse / Regional Science and Urban Economics 37 (2007) 457 – 465

461

a priori similar regions do not experience the same level of economic development. When

compared to earlier attempts made in regional economics, one appealing feature of NEG is that it

has very strong connections with several branches of modern economics, including industrial

organization and urban economics, but also with the new theories of growth and development. In

particular, NEG and endogenous growth theory share the same framework, using monopolistic

competition, increasing returns and spillovers. This suggests the existence of a high potential for

cross-fertilization, which is being explored in recent contributions ( Baldwin and Martin, 2004 ).

Another striking aspect of NEG is the very large number of empirical investigations it has

triggered ( Head and Mayer, 2004 ). However, if empirical papers deal with many regions (and

sectors), theory has focused almost exclusively on two regions (and sectors). Although such simple

settings have proven to be valuable to our understanding of spatial phenomena, they offer in

general a fairly poor basis for deriving testable predictions ( Behrens et al., 2005a ). In addition, it is

far from being clear that we can extrapolate the predictions and results derived from two-region

models to a multi-regional system. Quite the opposite: the answer is probably no although this is

not really recognized by the profession. Note that such

are reminiscent of

fairly old debates in trade theory. As concisely emphasized by Deardorff (1984, p.468) , the

Heckscher

“

dimensionality issues

”

is derived from a model of only two of each of goods, countries, and

factors of production. It is unclear what the theorem says should be true in the real world where

there are many of all three

–

Ohlin theorem

“

papers that claim to

present tests of the hypothesis have used intuitive but inappropriate generalizations of the

two× two model to deal with a multidimensional reality

”

. This inevitably affects applied work, since most

“

( Bowen et al., 1987 , p.791). The

dimensionality issue is likely to be part of the explanation for the

”

provided by

the numerous attempts made to test the theoretical predictions of NEG ( Head and Mayer, 2004 ).

A last remark is in order. NEG models typically rest on very specific models of monopolistic

competition, mainly the one by Dixit and Stiglitz. Therefore, such models lack the level of

generality that characterizes standard general equilibrium theory. Hence, it is fair to say that NEG

models have so far the scientific status of examples. We are fully aware of the many conceptual

and technical difficulties encountered in building general equilibrium models with imperfect

competition and increasing returns, so that working with a general model is probably out of reach.

Yet, for NEG and regional economics to achieve the status of economic theories, it is necessary,

we believe, to explore alternative formulations of monopolistic competition, and to check whether

its main conclusions remain valid within such frameworks. 6

“

moderate support

”

4. From two to many regions

In many scientific fields, the passage from one to two dimensions raises fundamental

conceptual difficulties. In NEG, it is the apparently innocuous passage from two to three regions.

The reason for this is that when there are just two regions, there is only one way in which these

regions can interact, namely directly; whereas with three regions, there are two ways in which

these regions can interact, namely directly and indirectly. In other words, in multi-regional

systems the so-called

“

three-ness effect

”

enters the picture and introduces complex feedbacks into

6 Ottaviano et al. (2002) revisit the core – periphery model within an alternative monopolistic competition model

featuring price competition effects and quasi-linear preferences. They show that the main conclusions of NEG are robust

with respect to these changes. Behrens and Murata (in press) propose an alternative framework of monopolistic

competition with both price competition and income effects. Its future application to NEG may constitute another step in

the direction of exploring the robustness of this theory.

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