The Dynamics of National Specialization

Giovanni Peri

No 156, Working Papers from IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University

Abstract: I explore the dynamics of national production in a two-sector, two country model with cross-sector mobility and forward-looking agents, when trade costs fall or when the news of a boom in a sector is learned. Using the phase diagram method, introduced by Baldwin 1999 in this type of applications, I discover some important and interesting features of the equilibria and of their stability properties, which would have been completely overlooked by the "simple" static model as in Fujita et al. 1999. In particular I find out that, lacking comparative advantage,specialization may not take place at all labor market rigidities are too high, while the existence of comparative advantage ensures full specialization for intermediate values of the trade cost even in the presence of high labor market rigidities.

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