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Core-periphery model with forward-looking expectations

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  • Baldwin, Richard E.

Abstract

The 'core-periphery model' is vitiated by its assumption of static expectations. That is, migration (inter-regional or intersectoral) is the key to agglomeration, but migrants base their decision on current wage differences alone--even though migration predictably alters wages and workers are (implicitly) infinitely lived. The assumption was necessary for analytic tractability. The model can have multiple stable equilibria, so allowing forward-looking expectations would have forced consideration of the very difficult perhaps even intractable issues of global stability in non-linear dynamic systems. This paper's main contribution is to present a set of solution techniques partly analytic and partly numerical that allow us to consider forward-looking expectations. These techniques reveal a startling result. If quadratic migration costs are sufficiently high, allowing forward-looking behaviour has no impact on the main results, so static expectations are truly an assumption of convenience. If migration costs are lower, however, forward-looking behaviour creates history-vs-expectations considerations. In this case self-fulfilling prophecy.
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  • Baldwin, Richard E., 2001. "Core-periphery model with forward-looking expectations," Regional Science and Urban Economics, Elsevier, vol. 31(1), pages 21-49, February.
    • Handle: RePEc:eee:regeco:v:31:y:2001:i:1:p:21-49
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    JEL classification:

    • F1 - International Economics - - Trade
    • F2 - International Economics - - International Factor Movements and International Business

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