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Why Capital does not Migrate to the South: A New Economic Geography Perspective

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  • Jang Ping Thia
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    Abstract

    This paper explains why capital does not flow from the North to the South - the Lucas Paradox - with a New Economic Geography model that incorporates mobile capital, immobile labour, and productively heterogeneous firms. In contrast to neoclassical theories, the results show that even a small difference in the ex-ante productivity distribution between North and South can a have significant impact on the location of firms. Despite differences in aggregate capital to labour ratios, wage and rental rates continue to be the same in both locations. The paper also analyses the effects of risk on industrial locations, and shows why 'low-tech' industries tend to migrate to the South, while 'high-tech' industries continue to locate in the North.

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    Bibliographic Info

    Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp0895.

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    Date of creation: Nov 2008
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    Handle: RePEc:cep:cepdps:dp0895

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    Web page: http://cep.lse.ac.uk/_new/publications/series.asp?prog=CEP

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    Keywords: Firm heterogeneity; capital mobility; economic geography;

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    17. Masahisa Fujita & Paul Krugman & Anthony J. Venables, 2001. "The Spatial Economy: Cities, Regions, and International Trade," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262561476, January.
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