Agglomeration and Growth with Endogenous Expenditure Shares

We develop a New Economic Geography and Growth model which, by using a CES utility function in the second-stage optimization problem, allows for expenditure shares in industrial goods to be endogenously de-termined. The implications of our generalization are quite relevant. In particular, we obtain the following novel results: 1) catastrophic agglom-eration may always take place, whatever the degree of market integration, provided that the traditional and the industrial goods are su ¢ ciently good substitutes; 2) the regional rate of growth is a¤ected by the interregional allocation of economic activities even in the absence of localized spillovers, so that geography always matters for growth and 3) the regional rate of growth is a¤ected by the degree of market openness: in particular, depend-ing on whether the traditional and the industrial goods are good or poor substitutes, economic integration may be respectively growth-enhancing or growth-detrimental. Key words: new economic geography, endogenous expenditure shares, substitution e¤ect JEL Classi\u85cations: O41, F43, R12.