DP3523 Factor Price Equalization in the UK?

Author(s): Andrew B. Bernard, Stephen J. Redding, Peter K. Schott, Helen Simpson
Publication Date: August 2002
Keyword(s): diversification cones, economic geography, relative factor prices, technology
JEL(s): C14, F11, F14
Programme Areas: International Trade and Regional Economics
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=3523

This Paper develops a general test of factor price equalization that is robust to unobserved regional productivity differences, unobserved region-industry factor quality differences and variation in production technology across industries. We test relative factor price equalization across regions of the UK. Although the UK is small and densely populated, we find evidence of statistically significant and economically important departures from relative factor price equalization. Our estimates suggest three distinct relative factor price areas with a clear spatial structure. We explore explanations for these findings, including multiple cones of diversification, region-industry technology differences, agglomeration, and increasing returns to scale.