The Core-Periphery Model with Forward-Looking Expectations
NBER Working Paper No. 6921
The 'core-periphery model' is vitiated by its assumption of static expectations. That is, migration (inter-regional or intersectoral) is the key to agglomeration, but migrants base their decision on current wage differences alone--even though migration predictably alters wages and workers are (implicitly) infinitely lived. The assumption was necessary for analytic tractability. The model can have multiple stable equilibria, so allowing forward-looking expectations would have forced consideration of the very difficult perhaps even intractable issues of global stability in non-linear dynamic systems. This paper's main contribution is to present a set of solution techniques partly analytic and partly numerical that allow us to consider forward-looking expectations. These techniques reveal a startling result. If quadratic migration costs are sufficiently high, allowing forward-looking behaviour has no impact on the main results, so static expectations are truly an assumption of convenience. If migration costs are lower, however, forward-looking behaviour creates history-vs-expectations considerations. In this case self-fulfilling prophecy.
Published: Baldwin, Richard E. "Core-Periphery Model With Forward-Looking Expectations," Regional Science and Urban Economics, 2001, v31(1,Feb), 21-49.