Two Essays on Footloose Capital, Mobile Labor, and Economic Geography

Developing two theoretical models, this study aims to re-examine the role of labor mobility and footloose capital in the development of the ‘new economic geography’ theoretical models, and tries to fill the theoretical gap about the effects of the interactions between these two mobile factors on the distribution of industries and thus, the implications of policies.
In order to answer whether capital mobility exacerbates or dampens the agglomerative tendency of footloose entrepreneurs, the first model incorporates a footloose-capital (FC) with a footloose-entrepreneur (FE) manufacturing industry based on a tractable analytical structure with two identical regions. This model shows that these two sectors interact with each other and features five types of equilibrium configurations. Most interestingly, this study finds that the mobility of physical capital plays a stabilizing role in the catastrophic agglomeration caused by footloose entrepreneurs. The bifurcation form of the FE-sector changes sequentially from ‘subcritical’, ‘supercritical with big jumps’, ‘supercritical with small jumps’, and to ‘supercritical without jumps’ along with the decreasing expenditure share or the increasing substitution elasticity of the FE-sector relative to that of the FC-sector. Different bifurcation forms not only mean different compositions of stable equilibria, but also imply different evolutionary trajectories of stable equilibria, namely, either ‘catastrophically’ or ‘gradually’. In fact, the ‘subcritical’ bifurcation form has the biggest ‘jump’ among these four forms. Therefore, the sequential changes, from ‘subcritical’ to ‘supercritical without jumps’, display the vanishing processes of discontinuous agglomeration evolutions.
In the second model, to examine the effects of heterogeneous labor mobility on the distribution of industries and analyze the subsidy policy for attracting firms, this study develops an analytically solvable new economic geography model, which incorporates heterogeneous locational preferences and intra-industry externality into the footloose capital model. Associated with such two sources of agglomeration forces, the spatial economy exhibits various bifurcation forms, from ‘supercritical’ to ‘subcritical’ patterns, which depends on the exogenous parameters. Following the equilibrium allocation of capital, the equilibrium distribution of labor also shows alternative patterns with smooth shifts or discontinuous jumps as well as hysteresis. When capital is completely concentrated, labor re-disperses along with the increasing trade freeness, and finally becomes symmetrically dispersed when the trade freeness reaches 1. On the examination of the subsidy competition, the full/partial core region''s ability to host capital in its region is getting worse when the dispersion force is getting relatively stronger. In addition, the share of labor in the welfare measurement determines the equilibrium outcomes in the subsidy competition. When this share exceeds a critical threshold, the original full/partial core region will convert to full periphery after the subsidy. Therefore, this study provides a more general insight regarding the effects of the relative strength of the dispersion force to the agglomeration force on the equilibrium outcomes of subsidy competition in the spatial economy.