The Choice of Technology and Economic Geography

Abstract

Empirical evidence shows that firms located in regions with larger population size are on average larger and more productive. To explain this empirical observation, firms producing intermediate goods are assumed to choose their technologies with different levels of fixed and marginal costs. In this general equilibrium model of economic geography, intermediate good producers engage in oligopolistic competition. The model is tractable and leads to interesting and analytical results. An intermediate good producer in the region with a higher population produces a higher level of output and has a lower marginal cost of production regardless of the existence of regional trade. With regional trade, if a worker moves from the region with a lower number of workers to the region with a higher number of workers, intermediate good producers in both regions choose less advanced technologies.

National integration and institution building

“…In this subsection, the number of nations is exogenously given. Similar to Zhou (2004, 2009, 2014, 2022), to provide public service, it is assumed that there is a continuum of institutions indexed by a number . A higher value of refers to a more rule‐based institution.…”

“…Rulers choose institutions with different levels of fixed and marginal costs. Like Zhou (2004Zhou ( , 2009Zhou ( , 2014Zhou ( , 2022, a more rule-based institution is assumed to have a higher fixed cost but a lower marginal cost in providing public services to citizens. This assumption can be motivated by the observation that the county system and Legalist institutions are more rule-based than feudalism and Confucian institutions (Qu, 2010) 2 and could have higher fixed costs to set up.…”

The choice of technology and international trade

“…5 Like Neary (2016), in a general equilibrium model with oligopoly, the motivation of specifying a continuum of manufactured goods rather than one manufactured good is to eliminate a bank's market power in the input market (attracting deposits) so that we can focus on a bank's market power in the output market (market for loans). Zhou, 2018Zhou, , 2021Zhou, , 2022Fujiwara and Kamei, 2018;Choi and Lim, 2019). There are two types of interest rates in this model: one is the interest rate banks pay to depositors and the other is the interest rate banks charge manufacturing firms.…”