IDEAS home Printed from
   My bibliography  Save this paper

Contracting externalities and multiple equilibria in sectors: Theory and evidence


  • Neus Bover
  • Juan J. de Lucio
  • Diego Rodríguez


We consider an economy where the production technology has constant returns to scale but where in the descentralized equilibrium there are aggregate increasing returns to scale. The result follows from a positive contracting externality among firms. If a firms is surrounded by more firms, employees have more opportunities outside their own firm. This improves employees' incentives to invest in the presence of ex post renegotiation at the firm level, at not cost. Our leading result is that if a region is sparsely populated or if the degree of development in the region is low enough, there are multiple equilibria in the level of sectorial employment. From the theoretical model we derive a non-linear first-order censored difference equation for sectoral employment. Our results are strongly consistent with the multiple equilibria hypothesis and the existence of a sectoral critical scale (below wich the sector follows a delocation process). The scale of the regions' population and the degree of development reduce the critical scale of the sector.

Suggested Citation

  • Neus Bover & Juan J. de Lucio & Diego Rodríguez, 1998. "Contracting externalities and multiple equilibria in sectors: Theory and evidence," Economics Working Papers 336, Department of Economics and Business, Universitat Pompeu Fabra.
  • Handle: RePEc:upf:upfgen:336

    Download full text from publisher

    File URL:
    File Function: Whole Paper
    Download Restriction: no

    More about this item


    Incomplete contracts; development; multiple equilibria; delocation trap;
    All these keywords.

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
    • O18 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Urban, Rural, Regional, and Transportation Analysis; Housing; Infrastructure
    • R12 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Size and Spatial Distributions of Regional Economic Activity; Interregional Trade (economic geography)

    NEP fields

    This paper has been announced in the following NEP Reports:


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:upf:upfgen:336. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.