TY  - JOUR
AU  - Baldwin,Richard E.
TI  - The Core-Periphery Model with Forward-Looking Expectations
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 6921
PY  - 1999
Y2  - February 1999
UR  - http://www.nber.org/papers/w6921
L1  - http://www.nber.org/papers/w6921.pdf
N1  - Author contact info:
Richard Baldwin
Cigale 2
1010 Lausanne
SWITZERLAND
Tel: 41-22-908-5900
E-Mail: rbaldwin@cepr.org
AB  - 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.
ER  -