New economic geography: Multiple equilibria, welfare and political economy.

This thesis contributes to the body of research known as the new economic geography. According to this paradigm, increasing returns to scale at the firm level, monopolistic competition, and transportation costs interact in shaping the spatial distribution of economic activity. The introductory chapter lays out the motivation of this thesis and puts it into the perspective of the existing literature. Chapter 1 introduces a typical model of new economic geography: the nature of the agglomeration and dispersion forces it displays is recurrent in this body of research; the model also displays multiple equilibria. The welfare properties of these equilibria are also analysed. Chapter 2 completely characterizes the set of equilibria of a wide range of models that are the quintessence of the new economic geography paradigm. The model of chapter 2 is shown to share the qualitative features of these models. Chapter 3 integrates a simple version of the model chapter 2 within a political economy framework. The welfare analysis of chapter 2 provides the motivation for this theoretical exercise. Chapter 4 seeks to provide an answer to the important but thus far neglected question of what is the mechanism that actually determines the magnitude policies that seek to affect the equilibrium spatial allocation of industries. The geography model is integrated in a fully specified political economy process of policy selection. Chapter 4 extends the model of chapter 2 to deal with the issue of the 'fragmentation' of the production process when new economic geography forces are at play. Finally, the analysis of chapter 5 contributes to the growing literature on the labour market imperfections as a driving force for agglomeration. In particular it shows how the hold-up problem can be softened or worsened by the cluster of industries using workers with similar skills