A Ramsey-Type Equilibrium Model with Spatially Dispersed Agents

We present a spatial and time-continuous Ramsey-type equilibrium model for households and firms that interact on a spatial domain to model labor mobility in the presence of commuting costs. After discretization in space and time, we obtain a mixed complementarity problem that represents the spatial equilibrium model. We prove existence of equilibria using the theory of finite-dimensional variational inequalities and derive a tailored diagonalization method to solve the resulting large-scale instances. Finally, we present a case study that highlights the influence of commuting costs and show that the model allows to analyze transitory effects of industrial agglomeration that emerge and vanish over time as in the real economy.