We develop a monopolistic competition model with heterogeneous agents who self-select into occupations (entrepreneurs and workers) depending on innate ability. The effect of market size on the equilibrium occupational structure crucially hinges on properties of the lower tier utility function—its scale elasticity and relative love for-variety.When combined with the underlying ability distribution, the share of entrepreneurs and income inequality can increase or decrease with market size. When extended to allow for the endogenous sorting of mobile agents between cities, numerical examples suggest that sorting may increase inequality within and between cities.
Standard measures of competitive toughness fail to capture the fact that, as consumers optimize intertemporally, firms operating today compete with (yet non-existent) businesses which will be started tomorrow. We develop a two-tier CES model of dynamic monopolistic competition in which the impact of product differentiation on the market outcome depends crucially on the elasticity of intertemporal substitution (EIS). The degree of product differentiation per se fails to serve as a meaningful indicator of competitive toughness: what matters is its cross-effect with EIS. We also extend the model to the case of non-CES preferences to capture variable markups.
This paper provides an empirical test of spatial wage convergence in Russian cities. Using geo-coded data covering 997 Russian cities and towns from 1996 to 2013, I show that real city wages (i) converge over time and (ii) are significantly affected by the initial levels of real wages in neighboring cities. I also find that cities of the Far North, where a special wage policy is implemented, were converging more slowly than the rest of the country. I find a significant negative impact of regional subsidies on real wages in cities outside the Far North, and that the effect of extractive industries on real wage has become weaker. These results are robust to the radius of spatial interaction, and my conclusions hold if remote settlements are not taken into account.
We develop an economic geography framework with positive trade costs in both manufacturing and traditional sectors, mobile skilled workers, and unequal shares of unskilled labour in regions. We show that partial agglomeration always features the home market effect (HME) regardless of whether regions trade only the manufacturing good or both. Moreover, spatial factor mobility is significant for the HME to arise while intersectoral mobility does not play a crucial role. Furthermore, a decrease in the traditional sector trade costs makes the HME weaker, and increases the likelihood of full agglomeration in the larger region. Finally, we show that a small departure from Cobb-Douglas upper-tier utility towards gross substitutability of manufacturing and traditional goods reinforces the HME while the opposite holds for gross complementarity of goods.
This paper compares the market equilibria in a differentiated industry under Cournot, Bertrand, and monopolistic competition. This is accomplished in a one-sector economy where consumers are endowed with separable preferences. When firms are free to enter the market, monopolistically competitive firms charge lower prices than oligopolistic firms, while the mass of varieties provided by the market is smaller under the former than the latter. If the economy is sufficiently large, Cournot, Bertrand and Chamberlin solutions converge toward the same market outcome, which may be a competitive or a monopolistically competitive equilibrium, depending on the nature of preferences.