Can Information Asymmetry Cause Agglomeration?

Marcus Berliant and Fan-chin Kung

MPRA Paper from University Library of Munich, Germany

Abstract: The modern literature on city formation and development, for example the New Economic Geography literature, has studied the agglomeration of agents in size or mass. We investigate agglomeration in sorting or by type of worker, that implies agglomeration in size when worker populations differ by type. This kind of agglomeration can be driven by asymmetric information in the labor market, specifically when firms do not know if a particular worker is of high or low skill. In a model with two types and two regions, workers of different skill levels are offered separating contracts in equilibrium. When mobile low skill worker population rises or there is technological change that favors high skilled workers, integration of both types of workers in the same region at equilibrium becomes unstable, whereas sorting of worker types into different regions in equilibrium remains stable. The instability of integrated equilibria results from firms, in the region to which workers are perturbed, offering attractive contracts to low skill workers when there is a mixture of workers in the region of origin.

Keywords: Adverse Selection; Agglomeration (search for similar items in EconPapers)
JEL-codes: D82 R12 R13 (search for similar items in EconPapers)
Date: 2008-03-02
New Economics Papers: this item is included in nep-cta, nep-geo and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Related works:
Working Paper: Can information asymmetry cause agglomeration? (2009)
Working Paper: Can information asymmetry cause agglomeration? (2009)
Working Paper: Can information asymmetry cause agglomeration? (2008)
Working Paper: Can information asymmetry cause agglomeration? (2008)
Working Paper: Can information asymmetry cause agglomeration? (2008)
Working Paper: Can Information Asymmetry Cause Agglomeration? (2006)
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