Spatial Economics

Spatial economics is concerned with the determinants and effects of the location of economic activity in space. It analyzes how geographical location shapes the economic activities performed by agents, their interactions with one another, their welfare, and the effects of public policy interventions. Two main lines of research can be distinguished: one is concerned with systems of cities or regions, and the other is concerned with internal city structure. Within each of these lines of research, the traditional theoretical literature in spatial economics considered stylized settings, such as two symmetric regions or a one-dimensional line. A major breakthrough in early 21st-century research is the development of quantitative spatial models. These models are sufficiently rich to capture observed features of the data, such as many asymmetric locations and a rich geography of the transport network. Yet they remain sufficiently tractable as to permit an analytical characterization of their theoretical properties, such as the existence and uniqueness of the equilibrium. With only a small number of parameters to be estimated, these models lend themselves to transparent identification. Since they rationalize the observed distribution of economic activity in the data, they can be used to undertake counterfactuals for the impact of empirically realistic public-policy interventions on this observed distribution. Among the insights that have emerged from these quantitative spatial models are the role of goods and commuting market access in determining location choices; the conditions under which the location of economic activity is characterized by multiple equilibria; the circumstances under which temporary shocks can have permanent effects (hysteresis or path dependence); the heterogeneous and persistent impact of local shocks; the magnitude and spatial decay of agglomeration economics; and the role of both agglomeration forces and endogenous changes in land use in shaping the impact of transport infrastructure improvements.