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Journal of Economic Geography Advance Access published online on October 21, 2009
Journal of Economic Geography, doi:10.1093/jeg/lbp046
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© The Author (2009). Published by Oxford University Press. All rights reserved. For Permissions, please email: journals.permissions@oxfordjournals.org

A simple theory of industry location and residence choice

Rainald Borck*, Michael Pflüger** and Matthias Wrede***

*Department of Economics, University of Passau, Innstr. 27, 94032 Passau, CESifo and DIW Berlin, Germany. email <rainald.borck{at}uni-passau.de>
**Department of Economics, University of Passau, Innstr. 27, 94032 Passau, DIW Berlin and IZA, Germany. email <michael.pflueger{at}uni-passau.de>
***University of Marburg, Faculty of Business Administration and Economics, Am Plan 2, 35032 Marburg and CESifo, Germany. email <wrede{at}wiwi.uni-marburg.de>

JEL classifications: F12, F22, R12, R23

Trade and factor mobility allow for a separation of the location of production from the location of residences. We provide a simple general equilibrium model which endogenously determines these two choices. Our specific focus is on how residences and the locations of production are affected by the secular decline in trade and mobility costs that we witness. The main prediction of our analysis is that economic integration in the sense of a joint reduction of distance-related frictions eventually leads to an increased spatial concentration of production and a decreased concentration of residences. Intuitively, if distance-related costs fall, households' residence choices will be affected more strongly by the motive to avoid rising land rent, whilst the increasing strength of agglomeration economies induces a stronger concentration of production. We focus on and formalize the theory in terms of long-distance commuting.

Keywords: agglomeration, labour mobility, industry location, commuting
Date submitted: 29 September 2008     Date accepted: 13 August 2009


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