This paper develops a simple model that shows how a country can endogenously become differentiated into an industrialized "core" and an agricultural "periphery." In order to realize scale economies while minimizing transport costs, manufacturing firms tend to locate in the region with larger demand, but the location of demand itself depends on the distribution of manufacturing. Emergence of a core-periphery pattern depends on transportation costs, economies of scale, and the share of manufacturing in national income.

First, the concentration of several firms in a single location offers a pooled market for workers with industry-specific skills, ensuring both a lower probability of unemployment and a lower probability of labor shortage. Second, localized industries can support the production of nontradable specialized inputs. Third, informational spillovers can give clustered firms a better production function than isolated producers.

This creates an obvious possibility for what Myrdal (1957) called "circular causation" and Arthur (1990) has called "positive feedback": manufactures production will tend to concentrate where there is a large market, but the market will be large where manufactures production is concentrated.

The circularity created by this Hirschman (1958)-type "backward linkage" may be reinforced by a "forward linkage": other things equal, it will be more desirable to live and produce near a concentration of manufacturing production because it will then be less expensive to buy the goods this central place provides.

But now let the society spend a higher fraction of income on nonagricultural goods and services; let the factory system and eventually mass production emerge, and with them economies of large-scale production; and let canals, railroads, and finally automobiles lower transportation costs. Then the tie of production to the distribution of land will be broken. A region with a relatively large nonrural population will be an attractive place to produce both because of the large local market and because of the availability of the goods and services produced there. This will attract still more population, at the expense of regions with smaller initial production, and the process will feed on itself until the whole of the nonrural population is concentrated in a few regions.

That is, when some index that takes into account transportation costs, economies of scale, and the share of nonagricultural goods in expenditure crosses a critical threshold, population will start to concentrate and regions to diverge; once started, this process will feed on itself.

If one region has slightly more population than another when, say, transportation costs fall below some critical level, that region ends up gaining population at the other's expense; had the distribution of population at that critical moment been only slightly different, the roles of the regions might have been reversed.

The effect of this assumption is to ensure that the price of agricultural output and, hence, the earnings of each peasant are the same in both regions. We shall use this common agricultural price/wage rate as numeraire. Second, transportation costs for manufactured goods will be assumed to take Samuelson's "iceberg" form, in which transport costs are incurred in the good transported. Specifically, of each unit of manufactures shipped from one region to the other, only a fraction T < 1 arrives. This fraction T, which is an inverse index of transportation costs, is the final parameter determining whether regions converge or diverge.

Despite large regional policy expenditures, regional inequalities in Europe have not narrowed substantially over the last two decades, and by some measures have even widened. Income differences across States have fallen, but inequalities between regions within each State have risen. European States have developed increasingly different production structures. And European regions have also become increasingly polarised in terms of their unemployment rates.

Despite this sizable intervention, regional inequalities in Europe have not narrowed substantially, and by some measures have even widened. Over the past fifteen years income differences across Member States have fallen, but inequalities between regions within each Member State have risen.

Yet both casual observation and empirical work in the area show there are relevant forces missing from the traditional analysis, which can widen regional disparities — even without large differences in underlying characteristics — and prevent convergence. The main argument arises from the observation that firms produce more efficiently and workers enjoy higher welfare by being close to large markets, and that large markets are in turn those where more firms and workers locate. This creates a cumulative causation process that tends to increase regional differences.

The cumulative causation mechanism modelled by Krugman (1991) relies on the assumption that, when a region does relatively well in attracting firms, it is able to attract more workers on the basis of higher wages and better access to a wider range of goods.

This is not the case in Europe, where adjustment to changes in regional fortunes takes place mostly through participation decisions (Decressin and Fatàs, 1995). Migration rates in Europe are low in comparison with those of the us (Bentivogli and Pagano, 1999).

The Single European Act was set to create a single market for goods and workers in the eu, yet only 1.5% of eu citizens live in a Member State different from where they were born.

Prediction 1: Falling trade costs between a sufficiently uneven core-periphery pair of regions lead to a reduction of industrial production in the integrating periphery relative to a non-integrating peripheral control region.

Prediction 2: The negative effect of integration holds, but to a lesser extent, for total regional production, and is reversed in sign for agricultural production.

Prediction 3: The negative effects of integration on industrial and total production are more pronounced among peripheral regions with initially lower trade costs to the larger core region. This interaction effect is related to what the trade literature has referred to as home market magnification (Baldwin et al., 2003).

Prediction 4: The negative effects of integration on industrial and total production are more pronounced among peripheral regions with an initially stronger market size differential to the core region.

The microfoundation of the home market channel is that falling trade costs attenuate the dispersion force at a faster rate than the agglomeration force.

Equilibrium profits are a positive function of access to consumer expenditure, and decreasing in access to competing industrial producers. The former enters as agglomeration force and the latter as a dispersion force.

On one hand, lower trade costs decrease the relative disadvantage of higher product market competition in the larger market because the relative increase in competition is stronger for the smaller region.

On the other hand, lower trade costs also decrease the market access advantage of the larger region because the relative increase in market access is stronger for the smaller region.

Aggregate GDP moves in parallel to industrial output, but less than proportional because labor formerly used in industry remains productive in the region.

Conversely, the reallocation of labor to the agricultural numeraire sector implies that falling trade costs have the opposite effect on agricultural output growth.

The prediction that the home market channel should operate more strongly among smaller peripheral regions is also intuitive. Falling trade costs weaken the dispersion force at a faster rate than the agglomeration force, so that for a larger core-periphery size gradient, and thus higher initial levels of agglomeration and dispersion forces, a given trade cost reduction requires more industrial concentration in the core to equalize profits.

Appendix 1 presents a simple multi-region coreperiphery model based on Helpman and Krugman (1985). Appendix 2 presents estimation results concerning the proportion and characterization of complier counties that drive the local average connection effects estimated in the paper.

I introduce capital as an input to industrial production and allow this factor to be mobile across regions as in Martin and Rogers (1995). This serves to adapt the original cross-country model without factor mobility to a within country setting with partial factor mobility without altering the original set of microeconomic forces at play

Descriptive statistics in Table 1 of the paper indicate that the model's size asymmetry threshold is clearly exceeded when comparing non-targeted peripheral counties to the targeted metropolitan city regions.

Modern transportation infrastructure can help foster cheaper travel and a better-connected economy. This column shows that improvements in transportation can affect the location choices of firms in ways that are often beneficial to large regions, but may be detrimental to small intermediate regions through job losses.

Long-haul economies imply that it becomes cheaper to travel once your trip is longer. To put it more formally, the marginal travel costs decrease with trip length.

Our results show that whether 'region three' benefits in terms of employment relative to 'region two' (which remains unconnected), depends on (i) the strength of the long-haul economies effect and (ii) the size of the intermediate region. When there are no long-haul economies effect and region three is large, this region always benefits from the connection. By contrast, when the long-haul economies effects are substantial and region three is small, this region may actually lose out from being connected to the infrastructure network.

The explanation for these seemingly conflicting findings is that there is a trade-off between a 'hub effect' and a 'market size effect'. In presence of long-haul economies, the hub effect implies that a connection to the new infrastructure makes it easier to reach other places through lower transport costs. This in turn attracts more firms and employment. By contrast, the market size effect implies that if a region is small, it is easier for firms to set up a business in a core region and to transport goods or people to the small, connected region instead.

First, one of the main objectives of the Shinkansen was to promote economic growth and development outside Tokyo – in smaller 'intermediate' places (Sato 2015).

Second, we show that the Shinkansen displays strong long-haul economies. Our estimations show that a 1% increase in travel distances increases travel time by only 0.8%.

Third, out of 160 million passengers per year, a very large share (approximately 65% in 2010) are technical workers and business travelers. Such a high number suggests that the Shinkansen may be considered as a transportation mode that affects significantly firms' location choices, through the travel of non-production workers (whose share in Japan has increased from 22% to 41% between 1952 and 2015). Last, the first Shinkansen lines were built more than 50 years ago, meaning their long-run effects should have materialised by now. All of this makes the Shinkansen a natural candidate to study the impact of long-haul economies on the location of firms.

We only keep municipalities that are outside ‘central’ cities – as defined by Kanemoto and Tokuoka (2002) – and compare the change in employment between 1957 (before the first Shinkansen line was opened) and 2014. Our empirical strategy addresses the issue that the most attractive and dense places may receive infrastructure investments and may be the first places that are connected. Our results deliver a consistent picture: intermediate areas lose employment when they are connected to the Shinkansen. The effects range from about 10-40%. While this effect may seem large, it is very much in the same order of magnitude as Faber (2014) and Baum-Snow et al. (2017) have found in their studies of the impact of new highways in China.

Our findings have an interesting political economy implication as they indicate that lobbying for intermediate places to receive a station may actually hurt the area. More specifically, they explain why the construction of a highway ramp or a high-speed rail station does not necessarily deliver its sought-after payoffs. Even though casual evidence suggests that our results are not out of the ordinary, the finding that intermediate areas may lose from being connected also depends on the attributes (e.g. the size, the type of employment etc) of the region that is connected, and the strength of long-haul economies in the transport mode considered. For example, a small and highly productive region which is part of an international trade network may benefit from connection.

Transportation infrastructure shapes the spatial economy in fundamental ways, with effects on regional disparities that are ambiguous at best (e.g. Baum-Snow et al. 2020, Faber 2014, Koster et al. 2021).

Therefore, by facilitating commuting, highways make connected municipalities more attractive

In a new paper with Stephan Fretz (Fretz et al. forthcoming), we study the consequences of the development of a major transportation infrastructure over a long period – the development of the Swiss highway network from 1960 to 2010 – on the sorting of residents and workers with heterogeneous incomes and skills. To the best of our knowledge, our paper and the contemporaneous work by Tsivanidis (2018, 2019) are the first to examine the effect of transportation infrastructure on the spatial allocation of heterogeneous workers.

Point 1: The population of rural municipalities that got access to the highway network grew by 17% relative to the country average

Point 2: This relative growth rises monotonically with the income distribution, from 5% for the bottom half to 42% for the top decile.

Point 3: The bulk of this relative growth arose at the expense of non-urban municipalities that were still not connected by 2010.

Point 4: The absence of overall relative urban flight masks a relocation of households from urban centres (relative growth of -41%) to suburban municipalities (relative growth of +42%).

Understanding the spatial and economic consequences of large-scale transportation infrastructures is important for several reasons. First, access to markets and proximity to workers and jobs are prominent criteria in the location decisions of firms and households. Therefore, transportation infrastructures are an important determinant of individual welfare and of regional disparities.

Second, the location of airports and the design of rail, road, and highway networks influence land-use patterns as much as ‘first nature’ geography: highways have been found to increase the size of cities (Duranton and Turner 2012), cause suburbanisation (Baum-Snow 2007, Baum-Snow et al. 2017, Brinkman and Lin 2020, Garcia-López and Viladecans-Marsal 2016), affect the product mix of cities (Duranton et al. 2014), and increase regional disparities (Baum-Snow et al. 2020, Faber 2014).

Third, at around 5% of GDP, the amounts of money involved in transportation infrastructure dwarf those of most other investment programmes (Redding and Turner 2015) but may also bring large-scale economic benefits (Allen and Arkolakis 2014, Donaldson 2018, Donaldson and Hornbeck 2016).

In our paper, we document that the development of the highway network played a substantial role in points 1 to 5. In particular, we find that the presence of a highway entrance/exit ramp within 10km of a municipality caused a long-term 24% increase in the share of top-income taxpayers living in the area and an 8% decrease in the share of below-median income earners.

Since low-income earners were initially over-represented in municipalities that became connected relative to the country average, highways reduced segregation in Swiss municipalities.

Connection to the highway network increases the commuting access of a municipality, which leads to two effects in the model. First, it attracts residents, which raises local demand for housing and increases local housing prices. This effect disproportionately hurts low-income earners because they spend a higher-than-average fraction of earnings on housing. Second, improving commuting access by car disproportionately benefits the well off because they are more likely to own and commute by car.

Both mechanisms yield the same qualitative outcome: a newly connected municipality becomes especially attractive to high-income, high-skilled residents.

Finally, we estimate the relative long-run welfare effects of the expansion of the Swiss highway network. We find that, over the years 1950–2010, the wellbeing of residents in non-urban municipalities with a highway connection in 2010 increases relative to that of residents in non-urban municipalities that were still unconnected by 2010. This relative welfare gain increases monotonically with the income quintile, from only 2% for the below-median income group to 12% for the top-10% income group.

Car use is a luxury; housing is a necessity. Thus, the benefits of highway access disproportionately accrue to the well off, and its costs disproportionately hurt low-income earners. Municipalities that get access to the highway network become relatively attractive to the best off and unattractive to the least well off.

The expansion of highway networks thus shapes the economic geography in a fundamental way: it alters the income distribution of municipalities and hence regional disparities. Using the development of the Swiss highway network over fifty years, this column provides conclusive evidence of this deep economic mechanism. Especially for Swiss municipalities, who have considerable fiscal authority and are engaged in tax competition, highways have thus a potentially large impact that merits further research.

How large are the benefits of transportation infrastructure projects, and what explains these benefits? This paper uses archival data from colonial India to investigate the impact of India's vast railroad network.

Guided by four results from a general equilibrium trade model, I find that railroads: (1) decreased trade costs and interregional price gaps; (2) increased interregional and international trade; (3) increased real income levels; and (4) that a sufficient statistic for the effect of railroads on welfare in the model accounts well for the observed reduced-form impact of railroads on real income in the data.

In 2007, almost 20 percent of World Bank lending was allocated to transportation infrastructure projects, a larger share than that of education, health, and social services combined (World Bank 2007).

Unfortunately, despite an emphasis on reducing trade costs in both economic theory and contemporary aid efforts, we lack a rigorous empirical understanding of the extent to which transportation infrastructure projects actually reduce the costs of trading, and how the resulting trade cost reductions affect welfare.

Empirically, I find that railroad access raises real income by 16 percent. This reduced-form estimate could arise through a number of economic mechanisms.

A key goal of Step 4 is to assess how much of the reduced-form impact of railroads on real income can be attributed to gains from trade due to the trade cost reductions found in Step 1.

Step 4: There exists a sufficient statistic for the welfare gains from railroads. That is, despite the complexity of the model's general equilibrium relationships, the impact of the railroad network on welfare in a district is captured by its impact on one endogenous variable: the share of that district's expenditure that it sources from itself.

Our results show that BRI transport infrastructure projects increase GDP for BRI economies by up to 3.35 percent and welfare, which accounts for the cost of infrastructure, by up to 2.81 percent.

These effects are equivalent to the impact of a coordinated tariff reduction by one-third for all BRI economies.

We also show that the gains from trade are not necessarily commensurate to the investments paid by each country and are highly asymmetric.

we find that three countries (Azerbaijan, Mongolia and Tajikistan) experience welfare losses as infrastructure costs overweigh gains.

In order to equalize all welfare gains among BRI members, it would be necessary that some countries with large gains in the baseline allocation compensate countries with losses.

we show that the welfare effects of BRI transport projects would increase by a factor of 4 if participating countries were to reduce by half the delays at the border and tariffs. All countries gain when the infrastructure projects are coupled with policy reforms.

The model also shows that BRI-related transport projects could increase GDP for non-BRI countries by up to 2.61 percent and for the world as a whole by up to 2.87 percent.

Common transport infrastructure can improve welfare, but it also creates challenges for countries participating in the projects. For any country, building a railway or a road has some value, but it also has value to the countries around it since improvements in one part of the transport network reduce shipping times for all countries in the network.

If each country alone decided how to invest in infrastructure, there are spillovers that would not be taken into account.

But common transport infrastructure also creates challenges, as it has large implications for public finances and may have asymmetric effects on the trade and gross domestic product (GDP) of individual countries. This raises the possibility that the countries that will build - and bear the cost of large sections of the project may not be the ones that will gain from it the most.

comparative advantage, production and trade, thus increasing welfare. At the same time, the need to finance transport infrastructure leads to higher taxes that reduce real consumption. The net welfare effect for each country results from the combination of the trade gains and the share of the costs of the common infrastructure.

the welfare effect of investing in transport infrastructure depends on the difference between the welfare gains that can be achieved through higher real consumption (the first term) and the real cost of investment.

Transport connects people, places and cities. Investment in transport infrastructure therefore helps bridging economic and social divides. It promotes economic growth and catching up of regions by providing access to jobs for workers and markets for firms.

Transport infrastructure has been a necessary condition for economic development for centuries and remains an important factor in the catching up of economically weaker regions.

In many OECD member countries, total inland transport infrastructure investment, i.e. investment in road and rail, amounts to more than 1% of gross domestic product (GDP), not even accounting for maintenance spending for the existing stock.

Improving transport networks yield both an immediate as well as a delayed economic dividend for regions. Through better integration into the wider transport network, regions immediately gain greater accessibility, i.e. greater market access.

For incumbent firms this means that they can reach more consumers for the same cost of transport, thereby increasing their potential customer or client base. Such an increase in their market allows firms to scale up production and leverage efficiency gains.

Areas with better accessibility provide stronger incentives for new and existing firms to locate there. Better access means firms can take advantage of the cheaper cost of land and rent, without foregoing a suitably deep pool of workers.

A delayed dividend accrues over time. As other regions grow, the market that can be reached from a connected region increases as well. Both dividends matter in practice.

For access to people (population in regions), two-thirds of the improvements in European regions between 1990 and 2012 came from the construction of new highways, and one-third from population growth in already connected regions.

Decisions should be taken after careful deliberation of the potential local and aggregate gains and losses, using careful cost‑benefit analyses in line with best practices in the OECD.

Accessibility improvements in urban transport raise productivity and wages but also housing costs. Firms and workers in larger cities are more productive due to "agglomeration benefits", i.e. economic gains related to density.

These benefits arise in large part through more opportunities for formal and informal interaction and learning for people, including a greater variety of jobs that match workers' skills. The results are higher wages for workers but also higher housing costs as neighbourhoods with greater access are coveted by an increasing number of people

Transport infrastructure connects businesses, people and places. It provides firms with access to markets, workers with access to jobs and cities and regions with access to the global economy.

To bridge divides, the report highlights the need to go beyond transport infrastructure investment and consider wider urban planning, as well as complementary measures in regions.

Policy makers have long used investing in public infrastructure as a means of reducing geographical disparities and promoting growth.

For this, the paper presents a systematic qualitative overview of the literature, covering more than 300 studies conducted between 1983 and 2022, focusing on specific infrastructure sectors, namely digital, energy, and transport

The study also considers various dimensions of development impact, including output and productivity, poverty and inequality, labor market outcomes, human capital formation, and trade, to develop a nuanced understanding of the mechanisms through which infrastructure contributes to these development outcomes, focusing on low- and middle-income countries. As such, it is the most substantive effort of its kind to date

Overall, despite some mixed results, the overwhelming balance of evidence suggests that infrastructure improvements are critical in supporting the development process.

While households' income and consumption benefit from the existence of rural roads, highways are also found to contribute to firms' competitiveness. Similarly, public transportation, railways, and ports have positive impacts on the development process.

The study also considers various dimensions of development impact, including output and productivity, poverty and inequality, labor market outcomes, human capital formation, and trade

A plausible channel for the negative effects on smaller places is the combination of long-haul economies and organizational reshuffling within multi-plant firms: lower travel costs make it easier to concentrate headquarters and high-value functions in the core while relegating routine production to the periphery

Yet these benefits come with pronounced spatial redistribution: large metropolitan areas attract headquarters and high-value activities, while many intermediate or peripheral areas lose employment, unless their neighboring cores are of a modest size.

The 1982 extension of Japan’s Shinkansen network is studied by Li and Xu (2018) . Peripheral municipalities faced population declines of 3–6%, while localities situated within approximately 150 kilometers of Tokyo gained both residents and economic activity. The evidence indicates that high-speed rail reinforced the agglomeration of population and employment within the larger Tokyo metropolitan area.

Improved connectivity with peripheral regions from central locations may reinforce processes of concentration and clustering in larger cities at the cost of the periphery by enabling economies of scale to be leveraged more effectively from urban hubs.

Firms concentrating activities in large agglomerations alongside other businesses can exploit internal economies of scale, such as minimizing fixed costs, as well as external economies of scale, including easy access to labour markets, potential employees, suppliers, and knowledge from other firms (sharing, matching, and learning; see Duranton and Puga, 2004).

high rents, land prices, and congestion in densely populated areas may reduce the attractiveness of central locations. In such cases, high-speed rail (HSR) can encourage the dispersion of economic activities to peripheral areas that maintain good accessibility to major cities

analyses of HSR connecting core with peripheral regions, aimed at reducing regional economic inequalities, yield mixed results. Particularly, in advanced economies, most effects tend to be redistributive rather than generative

most effects tend to be redistributive rather than generative, while it remains unclear when the disadvantages of concentration in core areas are large enough to trigger a large-scale rebalancing of economic activity towards peripheral areas

In such cases, high-speed rail (HSR) can encourage the dispersion of economic activities to peripheral areas that maintain good accessibility to major cities (see Krugman, 1991; Tomaney and Marques, 2013; Krugman and Venables, 1996).

Gutiérrez (2001), Martín et al. (2004), and López et al. (2008) all illustrated how HSR increases accessibility inequalities between regions with and regions without HSR-connectivity.

As is implied by new economic geography (NEG), reduced transaction costs may lead to the concentration of businesses in rich regions (for agglomeration effects see below) and regional divergence

the lowering of transaction costs through transport investments may stimulate the growth of jobs as a result of increased availability of labour to enterprises and more robust linkages between companies

Improved accessibility translates into a greater number of job seekers willing to commute to work even over longer distances.

particularly important WEIs are derived from infrastructure investments having a direct effect on densely populated areas and improving accessibility in large cities by increasing the size of functional urban areas (integration of labour markets, interconnection of urban areas, expansion of cities).

Although most authors point to negative elasticities for neighbours' public capital [115,116,117], there are also exceptions [118]. It is extremely important, especially for poorer, peripheral areas, whether the investment is part of an interregional or intraregional transportation system, which is emphasized by new economic geography models.

This article presents below a short overview of literature regarding the various wider spatial impacts (accessibility of cities/regions/country, distributive accessibility effects, spatial and urban planning)

In essence, this paper distinguishes wider spatial impacts by reference to the concept of peripherality understood as the inverse of accessibility measured mainly by the potential model.

changes in accessibility induced by infrastructure development often lead to a widening (rather than to a reduction) of regional disparities: by providing central and peripheral regions with a similar degree of accessibility, lagging regions may be at a disadvantage, as their firms – unless other advantages are developed simultaneously – are in a weaker position to compete than firms in the core (Puga 2002)

the weight of infrastructure in EU development budgets reflects a widespread belief in the power of transport infrastructure as one of the key – if not the key – mechanisms in order to achieve economic development and convergence.

results indicate that transport facilities are a key differentiating factor in explaining the growth gap [between Chinese provinces] and point to the role of telecommunication in reducing the burden of isolation

In China, empirical studies consistently highlight that HSR has accelerated population concentration in megacities (e.g. Beijing, Shanghai) while exacerbating shrinkage in peripheral or smaller cities

By reinforcing hierarchical urban networks, HSR amplifies existing core-periphery dynamics. It facilitates the movement of labour and economic activities towards HSR-connected hubs, consolidating the dominance of leading cities

While wage disparities between HSR and non-HSR cities have narrowed, employment inequality between core and peripheral regions has widened

skilled workers concentrate in high-wage, HSR-connected cities, while inland areas experience a loss of talent

China's top-down planning reinforces the dominance of core cities, while the EU's polycentric framework supports more balanced urban growth

Both Japan and China exhibit core-peripheral distributions with mobile labour forces, especially skilled groups, and economic activities being drawn to core cities