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Step-by-Step Migration to Efficient Agglomerations

Staff Report 221 | Published November 1, 1996

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Step-by-Step Migration to Efficient Agglomerations

Abstract

Recent literature suggests that historical accidents can trap economies in inefficient equilibria. In a prototype model in the literature, there are two locations, the productive South and the unproductive North. By accident of history, the industry starts in the North. Because of agglomeration economies, the industry may reside in the North forever—an inefficient outcome. This paper modifies the standard model by assuming there is a continuum of locations between the North and the South. Productivity gradually increases as one moves South. There is a unique long-run equilibrium in this economy where all agents locate at the most productive locations.