EXOGENOUS REGIONAL PRODUCTIVITY ASYMMETRIES IN A CORE-PERIPHERY MODEL

Abstract

I study how regional asymmetries in firms' productivity affect the spatial distribution of economic activity and social welfare. I introduce an exogenous regional asymmetry in the two-region core-periphery model by Pfluger to explore how the regional framework alone can affect firms' productivity. When transportation costs are not too high, I find that the agglomeration of industry in the most productive region is stable. When transportation costs are intermediate, I find that the agglomeration of industry in the least productive region is stable if the productivity gap is not too large. When transportation costs are relatively high, I find that the concentration of most of the industry in the most productive region is stable. Finally, I also conclude that public policies that diminish firms' market power and bring some industries into the least productive region are welfare-optimising.