Richard Florida's Creative Capital in a Trading Regional Economy: A Theoretical Investigation

Abstract

We first construct a theoretical model of a regional economy with two sectors. One sector uses physical and creative capital - in the sense of Richard Florida (2002) - to produce a knowledge good that is traded. The other sector uses physical and social capital to produce a good that is not traded. Second, we provide the first formal analysis of the creative capital accumulation decision faced by individuals in this regional economy and we compute the optimal length of time during which creative capital is accumulated. Next, we determine the relative return to creative capital and we use this return to conduct comparative statics exercises with our model's four parameters. Finally, we show that for a given interest rate, the relative price of the nontraded good is higher in regional economies where more creative capital is accumulated.