1 THE DISTRIBUTION OF OUTPUT AND FACTORS IN INTEGRATED ECONOMIC AREAS: NEW PERSPECTIVES AND EVIDENCE Harry P. Bowen † , Haris Munandar ‡ and Jean-Marie Viaene § February 6, 2007 Abstract This paper derives and tests three theoretical predictions regarding the distribution of output and factors across members of an integrated economic area (IEA) in which goods and factors are mobile. First, we show that each member’s shares of total IEA output and stocks of productive factors will be equal. If policies are largely harmonized across IEA members then this “equal-share” property implies that the growth in any member’s output and factor shares can be considered a random outcome. If IEA member output and factor shares evolve as geometric Brownian motion with a lower bound then the limiting distribution of each share across IEA members will be a rank-share distribution that exhibits a property called Zipf’s law. We then show this property implies that the limiting distribution of output shares depends only on the number of IEA members. We empirically examine for these theoretical predictions for two presumably integrated economic areas: U.S. states and E.U. countries. Our empirical findings strongly support Zipf’s law for the distribution of output, physical capital and human capital across members of these two IEAs. Support is also obtained for the “equal-share” property and for the prediction that the distribution of output across IEA members depends only on the number of IEA members. JEL Classification: E13, F15, F21, F22, O57 Keywords: growth, economic integration, factor price equalization, Zipf’s law † Vlerick Leuven Gent Management School, Vlamingenstraat 83, 3000 Leuven, Belgium; e-mail: harry.bowen@vlerick.be ‡ Erasmus University Rotterdam and Tinbergen Institute, P.O. Box 1738, 3000 DR Rotterdam, The Netherlands; e-mail: munandar@few.eur.nl § (Corresponding Author) Erasmus University Rotterdam, Tinbergen Institute and CESifo. Address: Department of Economics, H8-8, Erasmus School of Economics, Erasmus University, P.O. Box 1738, 3000 DR Rotterdam, The Netherlands; e-mail: viaene@few.eur.nl; fax: +31-10-4089161; phone: +31-10-4081397