Accounting for the ¡°Subnational Penn Effect¡±¡ªA General Theory of Regional and National Price Levels

Xiang Tang ()
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Xiang Tang: School of Economics, Peking University, Beijing 100871, China

Frontiers of Economics in China-Selected Publications from Chinese Universities, 2012, vol. 7, issue 1, 94-121

Abstract: As an extension of the neoclassical urban systems theory (Henderson, 1974), we develop a general theory of regional (inter-city) price dispersion which also explains the ¡°subnational Penn effect,¡± i.e., cross-city correlations among population size, prices, real income and human capital stock. The model is also a theory of international price dispersion that is observationally equivalent to and more appealing than the Balassa-Samuelson theory, implying that the (international) Penn effect may simply be an aggregate result of the ¡°subnational Penn effect.¡± Furthermore, it shows that, contrary to the popular view, economic integration can increase as well as decrease spatial price variation.

Keywords: regional price dispersion; Penn effect; Balassa-Samuelson; urban systems (search for similar items in EconPapers)
JEL-codes: F31 F41 R12 (search for similar items in EconPapers)
Date: 2012
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