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Locational signaling and agglomeration

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Keywords
  • R13 - General Equilibrium And Welfare Economic Analysis Of Regional Economies
  • D82 - Asymmetric And Private Information
  • Mechanism Design
  • D51 - Exchange And Production Economies

Abstract

Agglomeration can be caused by asymmetric information and a locational signaling effect: The location choice of workers signals their productivity to potential employers. The cost of a signal is the cost of housing at a location. When workers' marginal utility of housing is negatively correlated with their productivity, skill-biased technological change causes a core-periphery bifurcation where the agglomeration of high-skill workers eventually constitutes a unique stable equilibrium. When workers' marginal utility of housing and their productivity are positively correlated, skill-biased technological improvements will never result in a core-periphery equilibrium. Location can at best be an approximate rather than a precise sieve for high-skill workers.

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