This chapter examines empirical strategies that have been or could be used to evaluate the importance of agglomeration and trade models. This theoretical approach, widely known as “New Economic Geography” (NEG), emphasizes the interaction between transport costs and firm-level scale economies as a source of agglomeration. NEG focuses on forward and backward trade linkages as causes of observed spatial concentration of economic activity. We survey the existing literature, organizing the papers we discuss under the rubric of five interesting and testable hypotheses that emerge from NEG theory. We conclude the chapter with an overall assessment of the empirical support for NEG and suggest some directions for future research.

Very preliminary results, subject to change. We investigate the hypothesis that firms prefer to locate “where the markets are. ” We use theoretical model of location choice under imperfect competition to formalize this concept. The model yields an equilibrium profit equation incorporating a term closely connected to the market potential index introduced by Harris in 1954. The location decision is a function of demand expressed by consumers in all locations weighted by accessibility of those consumers. We also show that the spatial distribution of competitors should also be factored into the location choice. We then implement the model empirically, comparing our theoretically-derived measures of demand and competition “potentials ” with the more conventional demand and agglomeration variables. Our sample consists of firm-level location choices by Japanese firms between 1980 and 1995 and we use both the information on the choice of country and the choice of region inside each country in our analysis. JEL classification: F12, F15