On factor specificity, trickle down effects and regional disparities in income

Abstract

This paper sets up a three commodity, three factor (with one factor both industry and region specific) and two region model to examine the implications of specific and non-specific factor accumulation on regional disparities in income. Factor specificity is a real world phenomenon and may, for example be caused by geographic reasons. For instance oil wells, beaches and so on are geographically immobile inputs—oil wells for production of oil and beaches for production of tourism. This paper analyses the implications of above type of factors on regional income and contrasts it with the case of non-specific factor accumulation. The main results obtained are given below. First, region specific factor accumulationmay raise both the per capita and absolute income in the region endowed with the specific factor. Second, under certain plausible assumptions, region specific factor accumulation has no “trickle down” effects on the other region. Thus specific factor accumulation may lead to increasing regional inequalities under very mild looking restrictions. This is a disturbing result because it shows that a industry booming on account of region specific factor accumulation may have no impact on other regions of the economy. The paper thus highlights the cnditions for the absence of interregional “trickle down” effects. In contrast non-specific factor accumulation has no impact on interregional per capita distribution of income—highlighting yet again the importance of region specificity of a factor of production.