Expectations and industry location: a discrete time dynamical analysis
New economic geography (NEG) aims to explain long-term patterns in the spatial allocation of industrial activities by heavily relying on the inter-regional mobility of productive factors: labor, human, or physical capital. The authors introduce a trend rule as expectational hypothesis into a discrete-time NEG model -- specifically, into a symmetric footloose capital (FC) model, see [\textit{P. Martin} and \textit{C. A. Rogers}, ``Industrial location and public infrastructure, J. Int. Econ. 39, No. 3--4, 335--351 (1995; \url{doi:10.1016/0022-1996(95)01376-6})] for the original continuous-time formulation and [\textit{P. Commendatore}, \textit{M. Currie} and \textit{I. Kubin}, ``Chaotic footloose capital, Nonlinear Dyn. Psychol. Life Sci. 11, No. 2, 267--289 (2007)] for a reformulation in discrete time. The main results can be summarized as follows: (1) Local stability results are in line with the literature on expectations: specifically, compared to naive expectation, trend extrapolating behavior reduces the parameter range for which the symmetric equilibrium is locally stable, whereas trend reverting behavior increases the stability region; (2) In other discrete-time NEG models, cyclical attractors of any order as well as asymmetric cyclical solutions are possible; in addition, for trend reverting behavior, also quasi-periodic attractors may exist giving rise to a more plausible dynamic pattern; (3) Compared to the model with naive expectation, they find ample evidence of multistability: boundary fixed points, interior symmetric fixed points, and cyclical (chaotic) solutions coexist with complex basins of attractions.
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