Externalities, growth, and regional strongstagnationstrong - ePubWU.pdf

Externalities, growth, and regional stagnation Gunther Maier Institute for Urban and Regional Studies, Vienna University of Economics and Business Administration Vienna, Austria Email: gunther.maier@wu-wien.ac.at 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. This paper is a revised version of a paper that was given at the international workshop Theories of Regional Development: Lessons for Policies of Regional Economic Renewal and Growth, Uddevalla, Sweden, June 14-16, 1998. 1. Introduction In recent years, we have seen some fundamental developments in economic theory concerning the understanding of economic growth. The traditional growth theory was replaced by a set of models and arguments that are commonly known as „new growth theory“ (e.g., Romer, 1986, 1990, Rebelo, 1991, Grossamn and Helpman, 1992). These developments are fundamental in the sense that they demonstrate that some