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The Core-Periphery Model with Forward-Looking Expectations

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  • Richard E. Baldwin

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 analytic tractability. The model can have multiple stable equilibria, so allowing forward-looking expectations would have forced consideration of the very difficult perhaps even intractable issues of global stability in non-linear dynamic systems. This paper's main contribution is to present a set of solution techniques partly analytic and partly numerical that allow us to consider forward-looking expectations. These techniques reveal a startling result. If quadratic migration costs are sufficiently high, allowing forward-looking behaviour has no impact on the main results, so static expectations are truly an assumption of convenience. If migration costs are lower, however, forward-looking behaviour creates history-vs-expectations considerations. In this case self-fulfilling prophecy.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6921.

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Date of creation: Feb 1999
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Publication status: published as Baldwin, Richard E. "Core-Periphery Model With Forward-Looking Expectations," Regional Science and Urban Economics, 2001, v31(1,Feb), 21-49.
Handle: RePEc:nbr:nberwo:6921

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  1. Kiminori Matsuyama, 1990. "Increasing Returns, Industrialization and Indeterminacy of Equilibrium," Discussion Papers 878, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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  3. Fujita,Masahisa & Thisse,Jacques-François, 2013. "Economics of Agglomeration," Cambridge Books, Cambridge University Press, number 9781107001411, April.
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  7. Krugman, Paul, 1991. "History versus Expectations," The Quarterly Journal of Economics, MIT Press, vol. 106(2), pages 651-67, May.
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  9. Beavis,Brian & Dobbs,Ian, 1990. "Optimisation and Stability Theory for Economic Analysis," Cambridge Books, Cambridge University Press, number 9780521336055, April.
  10. Krugman, Paul, 1991. "Increasing Returns and Economic Geography," Journal of Political Economy, University of Chicago Press, vol. 99(3), pages 483-99, June.
  11. Venables, Anthony J, 1987. "Trade and Trade Policy with Differentiated Products: A Chamberlinian-Ricardian Model," Economic Journal, Royal Economic Society, vol. 97(387), pages 700-717, September.
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Cited by:
  1. 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.
  2. Forslid, Rikard & Midelfart, Karen Helene, 2005. "Internationalisation, industrial policy and clusters," Journal of International Economics, Elsevier, vol. 66(1), pages 197-213, May.
  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. 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.

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