Geographic Fragmentation in a Knowledge Economy: Theory and Evidence from the United States

Yang Jiao and Lin Tian

No 19661, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: This paper explores how internet technology advancements drive cross-city collaborations (or "geographic fragmentation"). We use a spatial equilibrium model with cross-city production and skill heterogeneity to analyze the effects of reduced communication costs on domestic fragmentation. Our model suggests that better internet leads to increased production fragmentation, concentrating skilled workers in larger cities and reducing their numbers in smaller ones. Empirical validation using a novel instrumental variable approach confirms these predictions. Our calibrated model indicates that internet advancements have increased real wages for both high- and low-skill workers, with welfare improvements partly due to spatial reorganization from enhanced production fragmentation.

Keywords: Internet; connectivity (search for similar items in EconPapers)
JEL-codes: R10 (search for similar items in EconPapers)
Date: 2024-11
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