Adding geography to the new economic geography: bridging the gap between theory and empirics

For reasons of analytical tractability, new economic geography (NEG) models treat geography in a very simple way, focusing on stylized ‘unidimensional’ geography structures (e.g. an equidistant or line economy). All the well-known NEG results are based on these simple geography structures. When doing empirical work, these simplifying assumptions become problematic: it may very well be that the main NEG results do not carry over to the heterogeneous geographical setting faced by the empirical researcher, making it inherently difficult to relate empirical results back to NEG theory. This article tries to bridge this gap by proposing an empirical strategy that combines estimation and simulation. First, we show by extensive simulation that many, but not all, conclusions from the simple unidimensional NEG models carry over when using more realistic geography structures. Second, we illustrate our proposed empirical strategy using a sample of European regions, combining estimation of structural NEG parameters with simulation of the underlying NEG model.