Comparative Advantage and Economies of Scale under Uncertainty

We study how regional specialization patterns and welfare are affected by uncertainty and economies of scale in an open economy. We use a multi-sector spatial equilibrium model with sectoral economies of scale, aggregate uncertainty, and irreversible mobility decisions by heterogenous workers. We analytically characterize the interactions between specialization, economies of scale, and uncertainty. We find empirical support for the model predictions by focusing on the impact of aggregate changes in volatility of sectoral productivity on U.S. regional economies. We calibrate the model using detailed data on U.S. commuting zones and international trade, and extending hat-algebra methods to accommodate uncertainty. Quantitatively, we find that uncertainty shifts employment away from riskier sectors and locations, relative to a deterministic benchmark, lowering the U.S. aggregate gains from trade by at least a third. Some regions, however, lose from trade, an effect mitigated by the presence of economies of scale, and worker heterogeneity.