Toward a general-equilibrium theory of a core-periphery system of cities

Abstract

This paper constructs a general-equilibrium spatial model of a core-periphery system of cities, allowing for labor heterogeneity. While unskilled workers are specialized in food production in the periphery, skilled workers with heterogeneous characteristics manufacture a high-tech commodity in the core. Unskilled wages are determined competitively, whereas skilled wages are determined via a symmetric Nash bargain between high-tech firms and skilled workers. A system of local cities forms competitively, and a single metropoly emerges due to sufficiently large positive matching externalities. We show that such an equilibrium spatial configuration exists under some regularity conditions. Moreover, the determinants of income disparity between the core and the periphery regions are examined.