DP2645 Skills, Agglomeration and Segmentation

Author(s): Tomoya Mori, Alessandro Antonio Turrini
Publication Date: December 2000
Keyword(s): Agglomeration, Core-Periphery Model, Interpersonal Inequality, Regional Inequality, Skill Heterogeneity, Transport And Communication Costs
JEL(s): F12, F16, R12, R13
Programme Areas: Labour Economics, International Trade and Regional Economics
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=2645

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.