Competition and Human Capital Accumulation: A Theory of Interregional Specialization and Trade

We consider a model with several regions whose technological ability and factor endowments are identical and in which transport costs between regions are non-negligible. Nonetheless, certain goods are sometimes produced by multiple firms all of which are located in the same region. These goods are then exported from the regions in which their production is agglomerated. Regional agglomeration of production and trade stem from two forces. First, competition between firms for the services of trained workers is necessary for the workers to recoup the cost of acquiring industry-specific human capital. Second, the technology of production is more efficient when plants are larger than a minimum efficient scale and local demand is insufficient to support several firms of that scale. We also study the policy implications of our model.