Working Paper: CEPR ID: DP2085
Authors: Richard E. Baldwin
Abstract: The 'core-periphery model' is vitiated by its assumption of static expectations. That is, migration (inter-regional or intersectoral) is the key to agglomeration, but migrants base their decision on current wage differences alone--even though migration predictably alters wages and workers are (implicitly) infinitely lived. The assumption was necessary for tractability. The model has multiple stable equilibria, so forward-looking behaviour requires characterisation of global stability in a non-linear dynamic system (a potentially intractable problem). This paper's main contribution is to present a set of solution techniques-partly analytic and partly numerical-that allows consideration of forward-looking expectations. Surprisingly, we find that if migration costs are sufficiently high, allowing forward-looking behaviour changes nothing, so static expectations are truly an assumption of convenience. If migration costs are lower, history-vs-expectations considerations emerge. Agglomeration, therefore, can be a self-fulfilling prophecy.
Keywords: economic geography; forward looking expectations
JEL Codes: F1; F2; R1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| forward-looking expectations (D84) | local stability properties (C62) |
| migration costs (F22) | stability of equilibria (C62) |
| migration costs (F22) | expectations of workers (J29) |
| expectations of workers (J29) | migration behavior (F22) |
| low migration costs (F16) | agglomeration as self-fulfilling prophecy (R11) |