Skills, agglomeration and segmentation |
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Authors: | Tomoya Mori Alessandro Turrini |
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Institution: | a Institute of Economic Research, Kyoto University, Yoshida-honmachi, Sakyo, Kyoto, 606-8501 Japan b European Commission, Directorate General of Economic and Financial Affairs, Av. de Beaulieu 1, 1050 Bruxelles, Belgium c CEPR, London, UK |
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Abstract: | This paper studies the role of skill heterogeneity in “new economic geography” models of location. In our setting, products are both horizontally and vertically differentiated, and producing higher quality goods requires workers with higher skills. Selling to customers based in a different location entails iceberg-type transport costs and additional “communication costs” consisting of a fixed quality loss. We show that the presence of pecuniary externalities creates a mechanism which always promotes spatial sorting of workers according to their skill levels. In particular, in all stable equilibria, workers with higher skill choose to stay in the location where aggregate skill and income is higher, while the less skilled stay in the other. |
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Keywords: | R12 R13 F12 F16 |
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