An analytically solvable core-periphery model

Abstract

We develop an analytically solvable version of the central model of ‘new economic geography’, the so called core‐periphery model by Krugman. While the modified model reproduces all the appealing features of the original one, it also allows us to obtain additional analytical results that are out of reach in Krugman's set‐up. First, we are able to assess the exact number of equilibria and their global stability properties. Second, we are able to investigate the implications of exogenous asymmetries between countries. This is achieved by introducing heterogeneity between high‐skill mobile and low‐skill immobile workers, which may also be an empirically attractive property.

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