Working Paper: NBER ID: w29101
Authors: Benny Kleinman; Ernest Liu; Stephen J. Redding
Abstract: We incorporate forward-looking capital accumulation into a dynamic discrete choice model of migration. We characterize the steady-state equilibrium; generalize existing dynamic exact-hat algebra techniques to incorporate investment; and linearize the model to provide an analytical characterization of the economy’s transition path using spectral analysis. We show that capital and labor dynamics interact to shape the economy’s speed of adjustment towards steady-state. We implement our quantitative analysis using data on capital stocks, populations and bilateral trade and migration flows for U.S. states from 1965-2015. We show that this interaction between capital and labor dynamics plays a central role in explaining the observed decline in the rate of income convergence across U.S. states and the persistent and heterogeneous impact of local shocks.
Keywords: dynamic spatial equilibrium; migration; capital accumulation; income convergence
JEL Codes: F14; F15; R12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| capital accumulation (E22) | speed of adjustment towards steady-state equilibrium (D50) |
| migration dynamics (J61) | speed of adjustment towards steady-state equilibrium (D50) |
| capital accumulation and migration dynamics (J61) | income convergence across U.S. states (H73) |
| initial conditions (C62) | income convergence across U.S. states (H73) |
| positive correlation between capital and labor gaps (E24) | slow convergence (F62) |
| negative correlation between capital and labor gaps (E24) | fast convergence (F62) |
| shocks to productivity and amenities (O49) | distinct impacts on convergence (F62) |