Can increasing returns to scale in search explain regional differentiation between cities and rural areas? To answer this question, we develop a model of an economy that consists of several regions. Within each region, jobs and workers are heterogeneous by respectively skill and job complexity type. Because of the search frictions, firms and workers in each region must trade-off a better expected match quality against a longer period of non-production. Labor mobility between regions induces the equalization of reservation wages for each skin type and interregional trade of end products yields regional specialization in production. The model predicts that high density areas make use of their scale advantage by producing end products with a high dispersion of skin requirements. Empirical evidence for the United States corroborates the implications of the model.

labor mobility, production, regional models, search
Production; Capital and Total Factor Productivity; Capacity (jel D24), Demographic Economics (jel J1), Mobility, Unemployment, and Vacancies (jel J6), Regional Government Analysis (jel R5)
hdl.handle.net/1765/6806
Tinbergen Institute Discussion Paper Series
Tinbergen Institute

Teulings, C.N, & Gautier, P.A. (2002). Search and the City (No. TI 02-061/3). Tinbergen Institute Discussion Paper Series. Retrieved from http://hdl.handle.net/1765/6806