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Can Information Asymmetry Cause Agglomeration?

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Author Info
Berliant, Marcus
Kung, Fan-chin

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Abstract

The modern literature on city formation and development, for example the New Economic Geography literature, has studied the agglomeration of agents in size or mass. We investigate agglomeration in sorting or by type of worker, that implies agglomeration in size when worker populations differ by type. This kind of agglomeration can be driven by asymmetric information in the labor market, specifically when firms do not know if a particular worker is of high or low skill. In a model with two types and two regions, workers of different skill levels are offered separating contracts in equilibrium. When mobile low skill worker population rises or there is technological change that favors high skilled workers, integration of both types of workers in the same region at equilibrium becomes unstable, whereas sorting of worker types into different regions in equilibrium remains stable. The instability of integrated equilibria results from firms, in the region to which workers are perturbed, offering attractive contracts to low skill workers when there is a mixture of workers in the region of origin.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 7414.

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Date of creation: 02 Mar 2008
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Handle: RePEc:pra:mprapa:7414

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Related research
Keywords: Adverse Selection Agglomeration

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Find related papers by JEL classification:
R13 - Urban, Rural, and Regional Economics - - General Regional Economics - - - General Equilibrium and Welfare Economic Analysis of Regional Economies
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
R12 - Urban, Rural, and Regional Economics - - General Regional Economics - - - Size and Spatial Distributions of Regional Economic Activity; Interregional Trade (economic geography)

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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Berliant, Marcus & Watanabe, Hiroki, 2008. "Explaining the size distribution of cities: x-treme economies," MPRA Paper 8410, University Library of Munich, Germany. [Downloadable!]
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