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The Core-Periphery Model With Forward-Looking Expectations

  • Baldwin, Richard

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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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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  1. Robert J. Barro & Paul Romer, 1993. "Economic Growth," NBER Books, National Bureau of Economic Research, Inc, number barr93-1, October.
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  6. Krugman, Paul, 1991. "History versus Expectations," The Quarterly Journal of Economics, MIT Press, vol. 106(2), pages 651-67, May.
  7. Fukao, Kyoji & Benabou, Roland, 1993. "History versus Expectations: A Comment," The Quarterly Journal of Economics, MIT Press, vol. 108(2), pages 535-42, May.
  8. Diego Puga, 1996. "The rise and fall of regional inequalities," LSE Research Online Documents on Economics 20643, London School of Economics and Political Science, LSE Library.
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