Early Agglomeration or Late Agglomeration? Two phases of development with spatial sorting

Author Name Rikard FORSLID (Stockholm University) / OKUBO Toshihiro (Keio University)
Creation Date/NO. January 2017 17-E-001
Research Project Analyses of Trade Costs
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This paper analyzes different development paths. Developing countries that limit the geographical movement of human capital (and firms) may end up on a different equilibrium path than countries that allow for geographical mobility. At the early stages of development (when transportation costs are high), the model has an equilibrium where low productive 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 periphery or small suburban cities is far higher than in capital 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 often seen in many developed countries.

Forthcoming: Forslid, Rikard, and Toshihiro Okubo. "Premature agglomeration?: Two phases of development with spatial sorting," Manchester School.