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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.

Suggested Citation

  • Berliant, Marcus & Kung, Fan-chin, 2008. "Can information asymmetry cause agglomeration?," MPRA Paper 8033, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:8033
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    References listed on IDEAS

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    Cited by:

    1. Marcus Berliant & Hiroki Watanabe, 2015. "Explaining the size distribution of cities: Extreme economies," Quantitative Economics, Econometric Society, vol. 6(1), pages 153-187, March.
    2. Marcus Berliant & Chia-Ming Yu, 2015. "Locational Signaling And Agglomeration," Journal of Regional Science, Wiley Blackwell, vol. 55(5), pages 757-773, November.
    3. 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.

    More about this item

    Keywords

    Adverse Selection; Agglomeration;

    JEL classification:

    • R13 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - General Equilibrium and Welfare Economic Analysis of Regional Economies
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • R12 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Size and Spatial Distributions of Regional Economic Activity; Interregional Trade (economic geography)

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