Search and the City
Can increasing returns to scale in search explain regional differentiationbetween cities and rural areas? To answer this question, the researchers developa model of an economy that consists of several regions.
Within each region, jobs and workers are heterogeneous by respectively skill and job complexity type. Because of the search frictions, firms and workers in each region must trade-off a better expected match quality against a longer period of non-production. Labour mobility between regions induces the equalization of reservation wages for each skin type and interregional trade of endproducts yields regional specialization in production. The model predicts that high density areas make use of their scale advantage by producing endproducts with a high dispersion of skill requirements. Empirical evidence for the United States corroborates the implications of the model.
When there is interregional variation in scale, interregional
labour mobility and trade cause specialization of regions. Labour
mobility offsets the general equilibrium effects of search. In
particular, given the task distribution, smallscale regions with
large frictions have on average a better skilled work force.This is
an equilibrium response to offset the skill spoiling effect.
Empirical evidence corroborates this surprising implication.
Furthermore, large scale regions use their comparative advantage in search to specialize in search intensive production, that is, the production of commodities with a highly dispersed distribution of inputs. This implication is also supported by the data. The evidence suggest that search frictions can explain about one third of the interregional wage differentials.
Erasmus University Rotterdam, Tinbergen Institute
C.N. Teulings and P.A. Gautier