Specialized consumer services cause agglomeration - A theoretical model and some implications for regional policy

This paper presents a regional economic model in which increasing returns to scale in the production of non-traded consumer services cause the agglomeration of high-skilled workers in one region. The residential choice of high-skilled individuals exerts a pecuniary externality on immobile low-skilled individuals. Therefore, the low-skilled in the periphery reach a lower utility level than those in the core. We analyze minimum wages, training, and redistributive taxation as policy instruments to promote the low-skilled in the periphery. Even if they affect one region only, all these instruments alter the interregional equilibrium and have complexly interacting effects.