Market Potential, Increasing Returns, and Geographic Concentration

By Gordon H. Hanson. 2005

1,050 citations recorded by the source corpus.

In this paper, I examine the relationship between increasing returns to scale and the geographic concentration of economic activity. Using data on U.S. counties, I estimate the structural parameters of the Krugman (1991) model of economic geography. The specification I use, which is derived from the equilibrium conditions of the model, resembles a spatial labor demand function as it is proximity to consumer markets tha determines nominal wages and employment in a given location. Parameter estimates show support for small but significant scale economies; the estimated price-marginal cost ratio is 1.1 in 1980 and 1.2 in 1990. The parameter estimatines also suggest that geographic concentration is a stable feature of the spatial distribution of economic activity. As a prelude to the analysis, I estimate a reduced form of the Krugman model which approximates Harris' (1954) market-potential function. The estimation results show how far demand linkages extend across space and how shocks to income in one location affect wages and employment in other locations. Demand linkages between regions are strong and growing over time, but limited in geographic scope. Simulations based on parameter estimates suggest that a 10% fall in personal income for a region the size of Illinois reduces employment by 6.0-6.4% in counties that are 100 km in distance, with effects declining to zero for counties more than 800 km in distance. The results are consistent with a high volume of trade within cities and between proximate cities.

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/539742910b4716387f313528adc98406bfa91f66

How researchers see this paper

The researchers whose trusted networks rank it highest, strongest advocate first. Every researcher gets a different order.

In Economics and Econometrics

Citations in the corpus

From Periphery to Core: Economic Adjustments to High Speed Rail (2010, background): “…that have attempted to estimate the spatial scope of regional economic integration in reference to the abovementioned NEG models find distance decays that are much larger than what would be in line with the physical (ice-berg) cost of goods transport (e.g. HANSON, 2005; MION, 2004; NIEBUHR, 2006).”
The Empirics of Agglomeration Economies (2014, neutral): “For instance, market size is measured with local total income in Head et al. (1999), and with two variables, manufacturing and services employment, in Guimaraes et al.”
An empirical analytical framework for agglomeration economies (2008, methodology): “This is essentially an accessibility based measure of agglomeration and it closely resembles the concept of market potential developed by Harris (1954) and used in recent empirical work on agglomeration by Mion (2004) and Hanson (2005) .”
From periphery to core: measuring agglomeration effects using high-speed rail (2018, neutral): “This interpretation is also in line with the significantly lower spatial decay found in an empirical NEG studies with an emphasis on trade costs (Hanson, 2005).”
Do migrants follow market potentials? An estimation of a new economic geography model (2004, methodology): “Thirdly, Hanson (1998) and Redding and Venables (2000) explore the spatial correlation of factor prices and demand.”
A new economic geography model of central places (2011, background): “Estimations of the elasticity of substitution r is between 4.9 and 7.6 in the US (Hanson, 2005), whereas r would be around 3.9 for Germany and 1.9 for Italy (Brakman et al., 2004; Mion, 2004).”
Frontiers of the New Economic Geography (2005, background): “Brakman et. al[29] applied Hanson’s[72] model to the case of Germany, and also found positive results.”
Variable returns to agglomeration and the effect of road traffic congestion (2007, methodology): “The effective density measures closely resemble the concept of market potential developed by Harris [21] and used in recent empirical work by Mion [26] and Hanson [20].”
History and Industry Location: Evidence from German Airports (2011, neutral): “Recent contributions to the empirical literature include Amiti and Cameron (2007), Davis and Weinstein (2003), Ellison and Glaeser (1997), Hanson (2004, 2005), Head and Mayer (2004b), Redding and Venables (2004), and Redding and Sturm (2008).”