Knowledge, economic geography, and growth in a two-group island economy

Abstract

This paper proposes a two-group urban model with endogenous capital and knowledge accumulation in an isolated island economy. The model examines the dynamic interdependence among knowledge utilization, creativity, transportation conditions, savings behavior, location choice, and residential pattern in a just two-group island economy. Although it is constructed with some strict assumptions, the model is quite general in the sense that the well-known models, such as the Solow-Swan model, the Kaldor-Pasinetti two-group model, and the Alonso model, can be considered, from a structural point of view, as its special cases. The knowledge accumulation in our model is based upon Arrow's learning-by-doing model. It is proved that the system may have a unique or multiple equilibria and each equilibrium may be stable or unstable, depending upon knowledge utilization and creation characteristics of the two groups. We also examine the impact of changes in the population and knowledge creation efficiency of two groups on long-run growth, wealth distribution, and residential structure.