The rise and fall of regional inequalities with technological differences and knowledge spillovers

We extend the standard economic geography model by introducing regional differences in technology levels and by assuming that initial technological gaps may be closed only when the learning capabilities of the lagging region are sufficiently developed. Interregional knowledge spillovers take place only when the initial technological gap is not too wide, and when trade costs, taken as a proxy for the obstacles to interaction between firms of different regions, are sufficiently low. Hence, low trade costs may produce either the agglomeration or the dispersion of the modern sector, while high trade costs lead to its agglomeration in the leading region.