Ott, I., Soretz, S.

European Journal of Political Economy, Vol. 73, 2022, 102137

Abstract

This paper analyzes within a spatial endogenous growth setting the impact of public policy coordination on agglomeration. Governments in each of the two symmetric regions provide a local public input that becomes globally effective due to integration. Micro-foundation of governmental behavior is based on three different coordination schemes: autarky, full or partial coordination. The ‘optimal’ size of the local public input - as measured by the expenditure share ratios - differs depending upon the extent to which the governments take interregional interdependencies and feedback effects into account. For a given degree of congestion, the resulting spatial distribution of economic activity is driven by integration and scale effects. The latter act as agglomeration and the former as dispersion force. Given full symmetry, arising externalities cancel w.r.t their impact on agglomeration. Coordination of public decisions that base on productivity considerations unequivocally foster concentration and destabilize the spreading equilibrium.