Academic research

Hawaiʻi's dependence on tourism has made its economy vulnerable to shocks and long-run stagnation. In response, there is growing interest in diversifying the economy to build resilience and foster new growth. This paper draws on a study using the principle of relatedness to identify diversification opportunities aligned with existing capabilities. However, identifying opportunities is not enough. If an industry has not emerged, some capability it requires is likely missing. The key policy task is to remove barriers to new industries by uncovering and addressing those gaps. While data access may be more limited for other island economies, the same policy design lessons apply, supporting locally tailored initiatives to identify and overcome barriers to growth.

Geographic price differences confound comparisons of economic performance across cities by conflating nominal urban advantages with real differences in well-being. Existing tools only partially address this problem: the Bureau of Economic Analysis publishes a Regional Price Parity (RPP) Index that represents relative price levels in US cities and states, but it is available only annually since 2008 and with a publication lag, limiting its usefulness for historical or high- frequency analysis. To address this measurement gap, we use the Consumer Price Index (CPI) for 29 US cities to construct a CPI-based RPP, enabling consistent comparisons of urban economic performance over time at constant and comparable prices. We exploit standard price-parity properties using publicly available CPI data to estimate CPI-based RPPs at a higher frequency and over longer historical horizons. This results in a CPI-based RPP for any period with published CPI data, as far back as 1913 in some cities to the most recent observations. By separating nominal urban advantages from cost-of-living differences, the index allows researchers to reassess claims about urban well-being, affordability, and the real returns to agglomeration. We demonstrate the index by examining long-run regional price dynamics and comparing real per capita GDP and real per capita personal income across cities at constant and comparable prices.

Hawai‘i’s economy, heavily specialized in tourism, is particularly vulnerable to shocks that disrupt tourism numbers. The Maui economy is even more dependent on tourists, and the extraordinary losses from the 2023 wildfires in Lahaina and Kula continue to dampen tourist numbers. To help understand the wider economic effects of the Maui wildfires, we quantify the statewide reduction in tourism spending in 2023 and 2024 and use the inter-county input output tables to construct a model to estimate the corresponding loss in its economic contribution. Our analysis reveals a steep contraction in Maui’s economy and traces negative spillovers from reduced spending on Maui to other counties in Hawai‘i, particularly Honolulu. Relative to the 12-month pre-wildfire baseline, the tourism expenditure shock implies an average employment impact of about 18,000 jobs in Maui County over September–December 2023, narrowing to just over half that magnitude, on average, throughout 2024. In late 2023, travel substitution toward Hawaiʻi Island and Kauaʻi was largely offset by declines on Oʻahu, leaving the total similar in magnitude to Maui alone. In 2024, statewide impacts amounted to approximately 23,100 full-time equivalent jobs and $2.3 billion in output, as the short-term substitution effects dissipate. Although the fires occurred on Maui, up to 28% of losses occur in other counties—predominantly Honolulu—largely through supply-chain linkages. The findings show how supply-chain linkages spread losses across counties, while demand-side substitution across counties provides limited, but temporary, and uneven buffering against these spillovers.

In this article, we set out the relationships between the behavioral and spatial responses to working from home. The analytical framework centres explicitly on the choice of commuting frequency as the key decision‐making variable that endogenously reshapes the relationships between other spatial and nonspatial variables as a result of the work‐from‐home revolution. We find that optimal commuting frequency is positively related to the opportunity costs of less‐than‐continuous face‐to‐face interaction and inversely related to commuting costs. As well as a “ donut effect” with growth in the suburbs and hinterlands around cities, our results also identify a “shadow effect” in smaller cities. The reason is that, somewhat counterintuitively, commuting frequency optimisation magnifies the benefits of working from home in larger cities because of a greater decrease in the burden of commuting. Our results imply enhanced productivity of larger cities over smaller cities, suggesting that the economic divergence between large cities and left‐behind places is likely to persist.

This article examines how rurality contributes to health disparities in the Hawaiian Islands using data from the June 2023 wave of a statewide health survey. We analyze self-reported health outcomes alongside sociodemographic factors including age, gender, race/ethnicity, income, education, and disability. Our findings show that rurality is one of the strongest predictors of poorer health outcomes, particularly in relation to physical health. Crucially, rurality amplifies the negative health impacts of both disability and poverty, indicating that marginalization compounds in rural contexts. By highlighting these interaction effects, the study contributes to research on rural health disparities and informs regional science debates on spatial inequality and territorial cohesion. By demonstrating that rurality amplifies poverty- and disability-related health disadvantages, our findings provide new insights into territorial cohesion and spatial justice challenges in regional science. The case of Hawaiʻi illustrates how place-based health disadvantages emerge in geographically distinct settings, reinforcing the need for spatially targeted policy interventions.

Many regions of the United States promote diversifying their industrial base as a primary goal in regional economic development strategies but rarely use objective tools to identify diversification opportunities and priorities. In this article, we summarize a case study using a novel approach to identify opportunities to diversify Hawaiʻi’s economy and discuss the wider policy implications of this approach for other regions. To explore diversification in Hawaiʻi, we apply the Principle of Relatedness, which predicts regional diversification patterns. We specifically focus on industries that are related because these have a higher probability of thriving. But to diversify, we look for new industries that are currently underperforming. The case study highlights the difficulty of diversifying and the challenges that are likely to face new industries, often requiring a significant policy response to be overcome.

Increasing returns to scale is essential to both spatial economics and macroeconomic growth. Spatial externalities imply external local increasing returns that generate an uneven spatial distribution of economic activity. While non-rival knowledge also implies increasing returns – in order to endogenise growth – this is not a spatial micro- foundation. Spatial theories of growth must be carefully specified to avoid unintended conclusions about the spatial economy and scale effects. This is demonstrated with a spatial endogenous growth model without scale effects that includes a spatial mechanism that facilitates agglomeration economies for innovation. In this class of models that combine spatial mechanisms with endogenous growth without scale effects, local increasing returns to scale imply that productivity, growth and interest rates are functions of the economy’s spatial distribution, but not its scale.

Achieving policy goals often requires different policies for different places, but the assignment of places to policies is often arbitrary, political, or based on anecdotal evidence. We argue that there are simple analytical techniques to improve policy by allocating places into corresponding 'policy regimes' in a more objective manner. We show how to implement this approach using a threshold model and relate the policy design to the underlying concept of agglomeration economies. Policies are implicitly based on an underlying hypothesis that adjusting specific factors will generate the desired outcome. The threshold approach modifies the underlying theory to allow for stepwise regimes, rather than a continuous function. These regimes determine bands of similar regions, or thresholds define when key variables have the greatest rate of rapid change in slope. Policy-makers can then assign places to policy regimes either according to bands in which similar places would require similar policy settings, or to target places just below thresholds to achieve greater impact by shifting places between thresholds. Bands and thresholds are determined by the data, rather than by anecdotal evidence, arbitrary assignment, bureaucratic experience, or political aims. We use the example of agglomeration economies in Australian cities to demonstrate this suggested approach.

Specialization in tourism exposes the economy of Hawai‘i to external shocks that trigger collapses in tourist numbers. Furthermore, Hawai‘i's economic growth has diminished for decades as the dominance of tourism has not generated productivity growth. In response, policy makers in Hawai‘i increasingly emphasize diversification. This article examines a spatial economics perspective to explain why Hawai‘i is so specialized, and to sketch policy for diversification and growth. Isolated, small, and open economies tend to be more specialized in one or a few industries because increasing returns to scale generates a coordination problem for new industries. By targeting industries that use related know-how, or a Hawai‘i-specific resource, Hawai‘i can access productivity gains from the scale of related and location -bound industries.

Hawaii was vulnerable to the COVID-19 pandemic due to its reliance on tourism. This article analyzes the pandemic’s economic impact in Hawaii by comparing outcomes with the pre-pandemic forecast. We explain why Hawaii’s experience differed from other states, suggest reasons for a slow recovery, and discuss the pandemic’s lasting effects.

I consider the impact of market contestability on innovation and growth. To examine this, I use discrete entry (i.e. an integer number of firms) as a tool to vary contestability in each sector of a disaggregated multi‐sector endogenous growth model. Contestability affects entry, extending results beyond competition. As a result, sectors with lower contestability have lower innovation and sectors characterized by Cournot oligopoly have lower innovation than sectors characterized by Bertrand. The effect of contestability is in addition to the effects of competition. Entry requirements become a consideration for innovation and growth policy, particularly in small or isolated economies.

Increasing returns to scale is the basis for many powerful results in economics and economic geography. But the limitations of assumptions about returns to scale in economic growth theories are often ignored when applied to geography. This leads to an unintentional bias favoring scale and mistaken conclusions about geography, scale and growth. Alternatively, this bias is used as a convenient modeling trick by urban economists to describe agglomeration economies for innovation without examining the spatial mechanisms that actually create agglomeration economies. I discuss techniques to focus on the distinctly geographic mechanisms that define returns to scale at appropriate spatial scales.

This article builds an understanding of regional innovation specialisation by developing a multi-sector model with endogenous growth through quality improving innovations and spillovers from related technologies. The model provides an approach to incorporate the relatedness literature within the mainstream theoretical frameworks of endogenous growth and economic geography. Each firm’s technology sector and the location of other firms play a role in each firm’s ability to improve its own technology. As a result, firms prefer to co-locate in technologically compatible clusters. Without relying on scale assumptions, the model for the first time coherently links related variety knowledge spillovers to mainstream urban economic frameworks and demonstrates that clustering is possible in both core and peripheral areas.

The so‐called “new growth theory” is characterized by the now Nobel Prize winning insight that ideas are a nonrival input to and output from endogenous investment in innovation. Nonrivalry implies increasing returns to scale, but this also unintentionally creates an empirically disputed scale effect that a growing population implies an ever‐increasing growth rate. Empirical evidence supports fully‐endogenous growth without scale effects, but theoretical issues sustain the decades‐long dispute over exactly how to negate the scale effect. This article surveys theoretical approaches to resolving the scale effect and shows how four generations of endogenous growth theory are defined by the maturing of modeling techniques for constraining increasing returns. The synthesis suggests that the dispute over scale effects is really a narrative about how the powerful application of increasing returns has followed a standard theoretical development pattern. This implies that a fourth generation is now emerging that negates the scale effect while retaining fully‐endogenous growth without relying on assumptions of linearity. Instead, the market response to excessive increasing returns to innovation constrains explosive growth by expanding the market, rather than by a linear assumption. This latest class of endogenous growth models may be the final chapter to resolving the long‐running dispute.

This article analyses the relationship between compatibility and innovation in markets with network effects using a model of competition with endogenous R&D, commercialization and compatibility. Compatibility is a mutual decision between firms and demand is partially dependent on overall consumption across compatible networks. Incumbent acquisition of an innovation or profit from entry provides entrepreneurs with an incentive for developing technological improvements and entrepreneurs receive greater returns if larger incumbents offer compatibility with their installed base. But for sufficiently weak network effects a large incumbent increases demand for its own product by denying compatibility to rivals. As a result, a credible threat of incompatibility reduces the entrepreneur's reserve to sell an innovation, but can also increase offers from smaller incumbents to acquire the innovation if it also avoids an incompatibility response from a larger incumbent. In response, entrepreneurs adjust their research effort in order to target a favourable compatibility regime that maximizes profit from entry or offers to acquire the innovation from incumbents. This leads to a complex relationship between the strength of network effects, innovation incentives, the entrepreneur's ambition for improvement and potentially disrupting the compatibility regime.

In this paper we model growth using a scale-neutral approach to innovation allowing differences between regions to emerge due to regional mechanisms. In this model, agglomeration is growth enhancing as the scale effect for innovation arises from greater access to knowledge rather than any assumed scale effects in growth-modelling techniques. Furthermore, entrepreneurs are assumed to choose the location of firms endogenously so as to minimize the costs of innovation, transport and living. The effects of such mechanisms are such that any policies that increase knowledge spillovers between locations will enhance growth and equality, but may be destabilizing for agglomeration.

This report considers evidence about the existence and scale of agglomeration economies, including in Australian cities. It examines whether city size affects productivity, and whether economic productivity, city size and rising housing costs are interdependent.

We describe how endogenous growth theory has now incorporated spatial factors. We also derive some of the policy implications of this new theory for growth and economic integration. We start by reviewing the product variety model of endogenous growth and discuss similarities with modeling techniques in the new economic geography. Both use Dixit- Stiglitz competition. Increasing returns provide an incentive for innovation in endogenous growth theory, and in combination with transport costs, increasing returns provide an incentive for firm location decisions in the new economic geography. Since innovation is the engine of growth in endogenous growth models and knowledge spillovers are a key input to innovation production, we also explore how innovation and knowledge have distinctly spatial characteristics. These modeling similarities and the spatial nature of knowledge spillovers have led to space being incorporated into the theory of endogenous growth. We guide the reader through how space is modeled in endogenous growth theory via the new economic geography. Growth by innovation is a force for agglomeration. When space is included, growth is enhanced by agglomeration because of the presence of localized technology spillovers. We consider the many other spatial factors included in models of space and growth. We explore the spatial effects on economic growth demonstrated by these theoretical models. Lastly, we consider policy implications for integration beyond lowering trade costs and discuss how lowering the cost of trading knowledge is a stabilizing force and is growth enhancing.