Local Growth Theory

Abstract

What is the effect of factor mobility on income convergence? Why are population flows so persistent? Extending the neoclassical growth model to allow for mobile labor, in a long run steady state, individuals and firms receive equal levels of utility and profits across localities. But frictions in the form of a cost to installing capital proportional to the rate of gross investment and an analogous cost to moving proportional to the rate of net migration effect extended equilibrium transition paths during which rents will be associated with living and owning capital in some localities relative to others. The speed of income convergence depends mostly on capital mobility (i.e. the installation cost) and is relatively insensitive to the degree of labor mobility. Persistent population flows result from relatively small changes in local productivity or quality of life, even with very high labor mobility; but even when population is relatively distant from its steady state level, wages and land prices remain relatively close to their steady-state levels. Local growth theory admits several other results. The speed of income convergence varies considerably in a neighborhood very close to the steady state. Consumption smoothing causes steady-state asset wealth and hence steady-state population density to be history dependent. Steady-state land prices rise at exactly the right rate to offset any flow of population from high productivity to high quality-of-life locales as per capita income rises.