We find that there exists therefore a range of trade costs for which a self-selecting
equilibrium is possible and another smaller range for which is the only stable equilibrium.
One of the results of the model is the existence of a wage and productivity differential
between the core and peripheral regions. Recent empirical works have supported this
prediction using micro data.
The paper presented is highly stylised. In particular, the existence of congestion costs
in the core region as in Helpman (1995), or an imperfectly mobile labour force across regions
as modelled by Ludema and Wooton19 (1997), can prevent the model from having an
unrealistic catastrophic agglomeration at low transport costs (especially in the EU context). It
is not intention of this paper discount these factors. The aim is to emphasise that the
mechanisms highlighted in the paper may play an important role in the debate concerning the
adequacy of regional cohesion policies at both national and European levels.
19 They assume that workers have preferences for living in a particular location. The labour supply is not
perfectly elastic as assumed in our model but the labour supply schedule is upward-sloping. The authors obtain a
U-shaped relationship between manufacturing location and trade liberalization.
31