DP11977 Early agglomeration or late agglomeration?: Two phases of development with spatial sorting

Author(s): Rikard Forslid, Toshihiro Okubo
Publication Date: April 2017
Keyword(s): agglomeration, Development, Heterogeneous Firms
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=11977

This paper analyzes different development paths. Developing countries that limit the geographical movement of human capital (and firms) may end up in a different equilibrium path than countries that allow for geographical mobility. At early stages of development (when transportation costs are high), the model has an equilibrium where low-productivity firms concentrate in the large market with abundant human capital, whereas the most productive firms agglomerate to the smaller region with a relatively high endowment of labor. We relate this type of equilibrium to countries in an early stage of development, where industrial productivity in the periphery or small suburban cites can be higher than in the largest mega-cities. As economies develop and transportation costs fall, the model switches to an equilibrium where productive firms concentrate in the larger and human capital rich region. This corresponds to a modern equilibrium where highly productive firms concentrate in the largest and most human capital rich regions as is often seen in many developed countries.