Most policy debates on regional policies implicitly assume that there is too much concentration. In our two-region model of migration, desirable concentration fails to occur under some conditions, and undesirable concentration occurs in others. In the latter case, even though the individuals collectively prefer to be distributed evenly across the two regions, they end up concentrating into one region in their pursuit of a better life. Hence, the freedom to move can be self-defeating. We characterize the conditions for such self-defeating concentration to occur. The coordination failures between the entry decision of service firms and the migration decision of individuals are caused by the incompleteness of markets due to the endogeneity of the range of services available, which deprive the agents of the opportunity to signal demand and supply for potential services. The argument does not rely on price distortions, the nonconvexities implied by increasing returns and nontradedness, congestion externalities, nor myopia in migration decisions.
ASJC Scopus subject areas
- Economics and Econometrics