Justin Delloye (Luxembourg Institute of Socio-Economic Research LISER)

Title: A New Approach to Complexity in Economic Geography

Abstract: The design of efficient regional policies calls for a reliable understanding of complex regional dynamics. Dedicated scientific efforts have historically been split up in two distinct research strands that are Location Theory and Complex Systems. In this presentation, I propose a conciliating modelling approach and I use it to address multiple equilibria issues in a model of New Economic Geography. In this field, the question of equilibrium selection traditionally reduces to a dependence on initial conditions. In more recent core-periphery models, the introduction of heterogeneous preferences generates exogenous shocks and therefore complex path-dependent dynamics. However, these recent models use averaging procedures which prevent them from discussing path-dependent dynamics. Starting from the footloose entrepreneur model, this method proposes a novel approach to adjustment dynamics, based on stochastic migration models, by which the dynamics of the population distribution is a continuous-time Markov chain. Using a diffusion approximation, it computes the evolution of the transition probability function in the state space of the regional system, which enables to discuss in particular the appearance of multiple peaks, denoting substantial divergences of sample paths. It enables further to identify, in explicit time units and at both short- and long-term horizons, periods when heterogeneous preferences may substantially affect the regional dynamic. Thus, this method raises new opportunities to improve the operational potential of New Economic Geography models.