The size of regions with land use for production

Highlighting market-size effects, the new economic geography has enriched our understanding of the functioning of the space economy. Contrary to its importance in practice, land use for production has received no attention in the branches of the economy, on which the new economic geography puts its focus: goods and services produced under increasing returns. We develop a simple general equilibrium model, an extension of the model by Helpman (1998), in which the increasing returns sector uses land in addition to labor. We identify a sharp contrast: with land use for production, a bell-shaped curve of spatial development can emerge. Such a curve is ruled out, however, if land is used for housing only. In contrast to common explanations for the bell-shaped curve which assume that part of the workforce is immobile, our approach builds on the insight that, ultimately, there is only one immobile resource, land.