29
Nov
2018
Path-dependent stochastic dynamics of core-periphery models with heterogenous agents
with Justin Delloye (LISER)
12:00 pm
01:00 pm
For inquiries:
seminars@liser.lu

Abstract

Equilibrium multiplicity is an essential modelling feature of New Economic Geography. Traditionally, the question of equilibrium selection reduces to a dependence on initial conditions. Yet the introduction of heterogeneous preferences in core-periphery models generates exogenous shocks which cancel this property. The result is a complex path-dependent dynamic, which is worth understanding in order to support the design and timing of regional policies. However, current core-periphery models with heterogeneous preferences use averaging procedures which prevent them from discussing these effects. Starting from the footloose entrepreneur model, we propose a novel approach to adjustment dynamics, based on stochastic migration models, by which the dynamics of the population distribution is a continuous-time Markov chain. Using a diffusion approximation, the regional system is reduced to a set of Itô stochastic differential equations. These equations enable to compute the dynamics of the transition probability function in the state space of the regional system, and to discuss it with respect to equilibrium states of its deterministic large population limit. From there, one can identify the periods of structural changes where policy intervention may be desirable. These results, along with the flexibility of our method, raise new opportunity to improve the operational potential of New Economic Geography

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