Transportation, freight rates, and economic geography

We investigate the role of the transport sector in structuring the location of economic activitywithin two-region economic geography models of the footloose capital and core-peripherytypes. In our setting, competitive carriers offer transport services for shipping manufacturedgoods across regions and freight rates are determined endogenously to clear transport markets.Each carrier commits to the maximum capacity for a round-trip and thus faces a simplelogistic problem: there are costs associated with 'returning empty', and those costs increase thefreight rates charged to manufacturing firms. Since demand for transport services depends onthe spatial distribution of economic activity, agglomeration in one region raises freight rates toserve foreign markets, thus generating an additional dispersion force. We show that a moreequal equilibrium distribution of firms prevails when freight rates are endogenouslydetermined than when they are exogenous and that multiple equilibria (including partialagglomeration) usually coexist....