Agglomeration and endogenous capital

The 'new' economic geography focuses on the footloose-labour and the vertically linked-industries models, Both are complex since they feature demand-linked and cost-linked agglomeration forces. I present a simpler model where agglomeration stems from demand-linked forces arising from endogenous capital with forward-looking agents. The model's simplicity permits many analytic results (rare in economic geography), Trade-cost levels that trigger catastrophic agglomeration are identified analytically, liberalisation between almost equal-sized nations is shown to entail 'near-catastrophic' agglomeration, and Krugman's informal stability test is shown to be equivalent to formal tests in a fully specified dynamic model. (C) 1999 Elsevier Science B.V. All rights reserved. JEL classification: F43; F20; F13.