Abstract
ABSTRACTAgglomeration can be caused by asymmetric information and a locational signaling effect: The location choice of workers signals their productivity to potential employers. The cost of a signal is the cost of housing at that location. When workers' marginal willingness to pay for housing is negatively correlated with their productivity, only the core‐periphery (partially stratified) equilibria are stable. When workers' marginal willingness to pay for housing and their productivity are positively correlated, there is no core‐periphery equilibrium. The urban wage premium is explained when there is a core‐periphery equilibrium. Furthermore, location can at best be an approximate rather than a precise sieve for high‐skill workers.
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