Academic journal article Atlantic Economic Journal

Land Endowment, Intersectoral Labor Mobility, and Economic Geography

Academic journal article Atlantic Economic Journal

Land Endowment, Intersectoral Labor Mobility, and Economic Geography

Article excerpt

Introduction

In a seminal paper, Krugman (1991) studies the spatial distribution of economic activities. While generating important insights on various important issues, there are some prominent features in his model that differ from reality. First, firms producing manufactured products engage in monopolistic competition. Second, production of the agricultural product does not use land. In reality, oligopolistic competition is a salient feature of the manufacturing sector in a modern economy and land plays an important role in the production of agricultural products.

Specifically, with increasing returns in production, distribution, and management, oligopolistic competition became the dominant type of market structure in leading industrial countries such as the United States (Chandler 1990). Pindyck and Rubinfeld (2005, p. 441) write that "oligopoly is a prevalent form of market structure. Examples of oligopolistic industries include automobiles, steel, aluminum, petrochemicals, electrical equipment, and computers." As the literature emphasizes increasing returns, compared with monopolistic competition in which firms are atomistic, oligopolistic competition is a plausible market structure. Models based on oligopolistic competition can address various issues that could not be easily addressed by models based on monopolistic competition, such as the strategic interaction among firms (Neary 2001).

Furthermore, one significant difference between agricultural production and manufacturing production is that the availability of land affects the production of agricultural products in important ways. The land constraint is a very significant constraint in the production of food. Historically, the pressure to produce sufficient food to support a growing population with limited land supplies led to serious environmental damage in some countries (Pomeranz 2000). Hence, to model the agricultural sector in a satisfactory way, it is necessary to incorporate land specifically into the production of agricultural products.

In this paper, we study regional distribution of industries in a general equilibrium model in which firms producing manufactured products engage in oligopolistic competition. There are two regions: region 1 and region 2. There are two types of products: the agricultural product and manufactured products. The agricultural product is produced by both land and labor. Manufactured products are produced by labor only. With the existence of fixed cost, the manufacturing sector exhibits increasing returns in production. There is intersectoral labor mobility. An individual can choose to be employed either in the agricultural sector or the manufacturing sector. For the manufacturing sector, firms engage in oligopolistic competition. Even with the incorporation of oligopolistic competition and intersectoral labor mobility into a general equilibrium model, the model is surprisingly tractable. Rather than relying on simulation, results are derived analytically.

The introduction of oligopolistic competition and incorporation of land in the production of the agricultural product lead to interesting implications. While a firm's output in Krugman (1991) is affected only by the elasticity of substitution and marginal cost, here a firms's output changes with fundamentals such as market size. For a closed economy, we show that for two regions with the same amount of labor, the region with a higher endowment of land has a comparative advantage in the production of the agricultural product. Therefore, regions engage in inter-industry trade rather than intraindustry trade as in Krugman (1991). When there is no regional trade, we show that whether or not an equal distribution of workers in different regions is stable is affected by the degree of contribution of land in the production of the agricultural product. If land does not play any role in the production of the agricultural product, a symmetric distribution of workers between regions is unstable. …

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