Growth and Employment in Europe: Sustainability and Competitiveness, Department of Economics, WU (Wirtschaftsuniversität Wien)
Externalities, Growth, and Regional Stagnation
Abstract: This paper discusses the impact of externalities on
economic growth and the long term distribution of economic activities in a
system of two regions. We use a standard neoclassical growth model of the
Solow-type and augment it with a random process of innovation allocation.
The long term behavior of this model is analyzed. As it turns out, the
dynamic behavior of our model differs fundamentally from that of the
standard neoclassical growth model. In the long run always one of the
regions attracts all the future innovation and growth while the other
region stagnates. We show that this outcome results from an externality in
the process of innovation allocation and discuss its significance and
sensitivity to changes in the model structure.
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