Working Paper: CEPR ID: DP2645
Authors: Tomoya Mori; Alessandro Turrini
Abstract: We investigate the role of skill heterogeneity in explaining location patterns induced by pecuniary externalities (Krugman (1991)). In our setting, sellers with higher skills perform better in the marketplace, and their sales are larger. Selling to distant locations leads to lower sales because of both (pecuniary) transport costs and communication costs that reduce the perceived quality of goods. A symmetry-breaking result is obtained: symmetric configurations cannot be stable, and regional inequality is inevitable. The relatively more skilled choose to stay in the location with higher aggregate income and skill, while the relatively less skilled stay in the other. The model allows us to analyse the links between the extent of interregional inequality and the extent of interpersonal skill inequality.
Keywords: agglomeration; core-periphery model; interpersonal inequality; regional inequality; skill heterogeneity; transport and communication costs
JEL Codes: F12; F16; R12; R13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Higher skill levels (J24) | Better marketplace performance (L10) |
| Higher skill levels (J24) | Larger sales (D49) |
| Transport and communication costs (L91) | Marketplace performance (L10) |
| Higher-skilled workers (J24) | Cluster in areas with higher aggregate income (R23) |
| Lower-skilled workers (J69) | Remain in less prosperous regions (R23) |
| Transport and communication costs (L91) | Dependence on local markets (D40) |
| Interpersonal skill inequality (I24) | Spatial agglomeration (R12) |
| Higher interpersonal skill inequality (D31) | Greater concentration of skilled workers (J69) |
| Lower-skilled workers (J69) | More likely to be found in less populated areas (R23) |
| Agents' heterogeneity (D82) | Generate regional inequality (R11) |