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The Core-Periphery Model With Forward-Looking Expectations

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  • Baldwin, Richard

Abstract

The 'core-periphery model' is vitiated by its assumption of static expectations. That is, migration (inter-regional or intersectoral) is the key to agglomeration, but migrants base their decision on current wage differences alone--even though migration predictably alters wages and workers are (implicitly) infinitely lived. The assumption was necessary for tractability. The model has multiple stable equilibria, so forward-looking behaviour requires characterisation of global stability in a non-linear dynamic system (a potentially intractable problem). This paper's main contribution is to present a set of solution techniques-partly analytic and partly numerical-that allows consideration of forward-looking expectations. Surprisingly, we find that if migration costs are sufficiently high, allowing forward-looking behaviour changes nothing, so static expectations are truly an assumption of convenience. If migration costs are lower, history-vs-expectations considerations emerge. Agglomeration, therefore, can be a self-fulfilling prophecy.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2085.

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Date of creation: Feb 1999
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Handle: RePEc:cpr:ceprdp:2085

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Keywords: Economic Geography; Forward looking expectaions;

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References

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Cited by:
  1. Giovanni Peri & Luisa Lambertini, . "Can Taxes Drive Agglomeration while approaching the Global Economy?," Working Papers 157, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  2. Lapo Valentina, 2003. "Spatial distribution of investment in Russia: the effect of agglomeration," EERC Working Paper Series 01-087e, EERC Research Network, Russia and CIS.
  3. Marco Maffezzoli & Federico Trionfetti, . "Approximation Methods: an Application to the Core-Periphery Model," Working Papers 219, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  4. Forslid, Rikard & Midelfart, Karen Helene, 2005. "Internationalisation, industrial policy and clusters," Journal of International Economics, Elsevier, vol. 66(1), pages 197-213, May.

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