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Can information asymmetry cause agglomeration?

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  • Berliant, Marcus
  • Kung, Fan-chin

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 8033.

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Date of creation: 01 Apr 2008
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Handle: RePEc:pra:mprapa:8033

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Keywords: Adverse Selection; Agglomeration;

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Cited by:
  1. Berliant, Marcus & Watanabe, Hiroki, 2008. "Explaining the Size Distribution of Cities: X-treme Economies," MPRA Paper 7090, University Library of Munich, Germany.
  2. Gregory DeCoster & William Strange, 2012. "Developers, Herding, and Overbuilding," The Journal of Real Estate Finance and Economics, Springer, vol. 44(1), pages 7-35, January.
  3. Berliant, Marcus & Yu, Chia-Ming, 2012. "Locational signaling and agglomeration," MPRA Paper 41838, University Library of Munich, Germany.

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