The Effects of Globalization on Regional Inequality in a Model of Semi-Endogenous Growth and Foot-loose Capital

We show that manufacturing firms locate only in northern regions when transportation costs are not high, and in both northern and southern regions when transportation costs are high; we do so through the use of a semi-endogenous research and development growth model with international trade, footloose capital, and local knowledge spillover. Regional income inequality—defined as per-capita expenditure relative to price index—decreases in the latter case, because the northern share of expenditure does not change, on account of a constant and exogenous growth rate. The northern price index does not change, even as the southern price index decreases.