A perfect foresight model of regional development and skill specialization

Abstract

This paper proposes a perfect foresight model of a two-region two-sector economy, where localized externalities in the acquisition of skills cause specialization and uneven regional development. The introduction of a new technology either reinforces or reverses this development pattern. Wealth differences are reinforced if, in spite of higher wages, the new technology locates in the advanced region, attracted by skills similar to the needs of the new industry. Otherwise the new technology locates where wages are lower, in which case the lagging region overtakes the leading one. In spite of perfect foresight, history alone determines the outcome in this economy.