Agglomeration under Forward-Looking Expectations: Potentials and Global Stability

Oyama, Daisuke (2006): Agglomeration under Forward-Looking Expectations: Potentials and Global Stability.

Abstract

This paper considers a class of migration dynamics with forward-looking agents in a multi-country solvable variant of the core-periphery model of Krugman (Journal of Political Economy 99 (1991)). We find that, under a symmetric externality assumption, our static model admits a potential function, which allows us to identify a stationary state that is uniquely absorbing and globally accessible under the perfect foresight dynamics whenever the degree of friction in relocation decisions is sufficiently small. In particular, when trade barriers are low enough, full agglomeration in the country with the highest barrier is the unique stable state for small frictions. New aspects in trade and tax policy that arise due to forward-looking behavior are discussed.

• Item Type: MPRA Paper
• Language: English
• Keywords: economic geography; agglomeration; perfect foresight dynamics; history versus expectations; stability; potential game; equilibrium selection
• Subjects: R - Urban, Rural, Regional, Real Estate, and Transportation Economics > R1 - General Regional Economics > R12 - Size and Spatial Distributions of Regional Economic Activity; F - International Economics > F1 - Trade > F12 - Models of Trade with Imperfect Competition and Scale Economies ; Fragmentation; C - Mathematical and Quantitative Methods > C6 - Mathematical Methods ; Programming Models ; Mathematical and Simulation Modeling

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