Regional Growth and Development without Scale Effects – a Simple Model of Endogenous Formation of Regions

We present a semi-endogenous model of regional growth and development without scale effects. In this model of a small developing region the world growth rate of technical progress is given. Regional growth is driven by technological change induced by imitation. Imitation is determined by positive externalities from international trade. Regional factor endowments consist of immobile land and human capital which is perfectly mobile between regions. In order to study the endogenous formation of regions we introduce a second region and analyze a non symmetric decrease in international transaction costs. We find agglomeration in the region with better access to international markets, while the less favored region will realize a drop in income and technological capability. Two reactions can be identified. 1. For given resource endowments, the technological imitation process determines the final relative technological steady state positions. 2. Migration between the regions endogenously determines the final resource endowments of the regions. When reaching the no migration equilibrium, the relative development position, the population size and density of the region, as well as comparative advantages are endogenously determined.