Recent theoretical work on economic geography emphasizes the interplay of transport costs and plant-level increasing returns. In these models, the spatial distribution of demand is a key determinant of economic outcomes. In one strand, it is argued that higher demand gives rise to a more than proportionate increase in production, a result known as the home market effect. Another strand emphasizes the effects of market sizes on factor prices. We highlight the theoretical connection between these two strands. Using data on 57 European regions, we show how wages and employment respond to differentials in what we call real market potential, a discounted sum of demands derived from the theory. JEL Classification: F12, F15, R11, R12. Key words: Home market effects, wage equation, gravity equation, new economic

Krugman's (1980) model of trade predicts that the country with the relatively large number of consumers is the net exporter and hosts a disproportionate share of firms in the increasing returns sector. He terms these results "home market effects." This paper analyzes three additional models featuring increasing returns, firm mobility, and trade costs to assess the robustness of home market effects to alternative modeling assumptions. We find strikingly similar results for two of the models that relax assumptions about the nature of demand, competition, and trade costs. However, a model that links varieties to nations rather than firms can generate opposite results. JEL classification: F12, R3 Keywords: spatial Cournot competition, home market effect, increasing returns Corresponding author: Faculty of Commerce, University of British Columbia, 2053 Main Mall, Vancouver, BC, V6T1Z2, Canada. Tel: (604) 822-8492, Fax: (604) 822-8477, Email: keith.head@ubc.ca y TEAM-University of Paris I and CNRS, 106-112 Bd de l'hopital 75647 PARIS CEDEX 13, France. Tel/Fax: +33 1 44 07 82 70, Email: tmayer@univ-paris1.fr z CERAS ( Ecole Nationale des Ponts et Chaussees), 28 rue des Saints-Peres, 74343 Paris CEDEX 07 x Faculty of Commerce, University of British Columbia, 2053 Main Mall, Vancouver, BC, V6T1Z2, Canada. Email: john.ries@ubc.ca Does a large home market confer an advantage to the firms that produce there? Krugman's trade model of monopolistic competition yields two related predictions regarding the effects of market size asymmetries on the geographic distribution of industry activity. First, Krugman (1980) demonstrates that the country with the larger number of consumers of an industry's goods will run a trade surplus in that industry. Further development of the model...

We develop and apply a criterion to distinguish two paradigms of international trade theory: constant-returns perfectly competitive models, and increasing-returns monopolistically competitive models. Our analysis makes use of the pervasive presence of home-biased expenditure. It predicts that countries ’ relative output and their relative home biases are positively correlated in increasing-returns sectors, while no such relationship exists in constantreturns sectors. We estimate country-level sectoral home biases through a gravity equation for international and intranational trade, and we use those estimates to implement our test on inputoutput data for six European Union economies. JEL classification: Keywords: F1, R3 international specialisation, new trade theory, home-market effects, border effects

We develop and apply a discriminating criterion to distinguish the two principal paradigms of international trade theory: constant-returns perfectly competitive models on the one hand, and increasing-returns monopolistically competitive models on the other. Our criterion rests on the existence of home-biased demand. It predicts a positive relationship between countries ’ relative output and their relative home bias in increasing-returns sectors, and no relationship in constant-returns sectors. In implementing the test on data for OECD countries we find that industries accounting for up to two thirds of manufacturing output conform to the increasingreturns monopolistically competitive model.

We study the impact of home-biased public expenditure on international specialisation in general equilibrium models with increasing returns and monopolistic competition. It is found that home-biased procurement attracts increasing-returns industries to the home country (the “pull ” effect) and attenuates the overall degree of industrial specialisation (the “spread” effect). Empirical evidence based on input-output data for the European Union confirms the existence of these links between public expenditure and the location of manufacturing activities. JEL classification:

This paper analyzes the impact of corruption on bilateral trade flows, highlighting the dual role of corruption in terms of extortion and evasion. On one hand, corruption taxes trade, when corrupt customs officials in the importing country extort bribes from exporters (the extortion effect); on the other, if tariffs are high, corruption may be trade enhancing, when the corrupt officials allow exporters to evade tariff barriers (the evasion effect). The paper derives and estimates a corruption-augmented gravity model that shows that the effect of corruption on trade flows is ambiguous and is contingent on the level of tariffs. The predictions are borne out in the data: corruption taxes trade in the majority of cases, but in high tariff environments (covering 5-14 % of the observations,) its marginal effect is trade-enhancing.

This paper presents a survey of recent research on the economics of infrastructure in developing countries. Energy, transport, telecommunications, water and sanitation are considered. The survey covers two main set of issues: the linkages between infrastructure and economic growth (at the economy-wide, regional and sectoral level) and the composition, sequencing and efficiency of alternative infrastructure investments, including the arbitrage between new investments and maintenance expenditures; OPEX and CAPEX, and public versus private investment. Following the introduction, section 2 discusses the theoretical foundations (growth theory and new economic geography). Section 3 assesses the analysis of 140 specifications from 64 recent empirical papers— examining type of data used, level of aggregation, econometric techniques and nature of the sample—and discusses both the macro-econometric and microeconometric contributions of these papers. Finally section 4 discusses directions for future research and suggests priorities in data development.

This paper proposes a discriminating hypothesis apt to distinguish between two paradigms of international trade: (1) Constant-Returns-Perfect-Competition (CRS-PC) and (2) Increasing-Returns-Monopolistic-Competition (IRS-MC). The discriminating hypothesis rests on the different degree of home bias among “consumers”. It predicts a positive relationship between a country’s share of world’s output (in any particular sector) and the country’s share of world’s home biased expenditure if the sector is IRS-MC and no relationship if the sector is CRS-PC. Accordingly, six sectors (covering 43.85 % of industrial activity) are associated with IRS-MC, nine sectors (30.15 % of industrial activity) with the CRS-PC paradigm. Results were not conclusive for the remaining three sectors.

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Study of the factor content of trade has become a laboratory to test our ideas about how the key elements of endowments, production, absorption and trade fit together within a general equilibrium framework. Already a great deal of progress has been made in fitting these pieces together. Nevertheless, the existing research raises a great many questions that should help to focus empirical research in the coming years. Among the more pressing issues is a deeper consideration of the role of intermediates, the role of aggregation biases, and of differences in patterns of absorption. This work should provide a more substantial foundation for future policy work developed within a factor content framework.