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Market potential and dispersion ?

Market potential and dispersion ?. An estimation of the Hanson-Helpman equation Manuel D. Lecumberri F. November 2009. The Helpman 1995 model(H95). Unlike the Krugman 1991( K91 ) model: all workers are mobile; there is a non-tradable good: housing services.

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Market potential and dispersion ?

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  1. Market potential and dispersion? An estimation of the Hanson-Helpman equation Manuel D. Lecumberri F. November 2009

  2. The Helpman 1995 model(H95) Unlike the Krugman 1991(K91) model: • all workers are mobile; • there is a non-tradable good: housing services. • so the higher the number of workers in region j, the lower their utility. This is a powerful dispersion forcenot present in K91

  3. Hanson's reduced form (1) A wage equation for each region: Real wages are equal in all regions: Spending and income earned in the housing sector are equal:

  4. Hanson's reduced form (2) Hanson (1998, 2005) reduced form eliminates regional price indexes and has to assume that real wages are equalized across regions.

  5. …how I estimated the equation • Used 2427 Mexican municipalities grouped in 92 regions. Hanson uses 30?? counties grouped in 51 regions (Estates); • Assume hob and spokes alike; • Regions arebuilt with a different procedure; • I use fixed effects (time-invariant) while Hanson uses 1st difference with IV.

  6. …how regions are built

  7. The three structural parameters σ > 1Elasticity of substitution between any pair of manufactures (traded goods) 0 < μ < 1Share of income expended in manufactures (traded goods) τ > 1Transport cost

  8. Mapped fixed (t-invariant) effects αj

  9. εj = αj + ηj αjηj Fixed (t-invariant) effectsError term: (t-variant) omitted variables

  10. Fixed effects (t-invariant)αj Omitted variables? * Zones of minimum wages; * Access to USA market is better for Central and Northern regions; * Relative productivity of labour has remainhigher in North and Centre. So might be capturing different qualities of labour.

  11. Error term (t-variant)ηj Omitted variables? * Improved access to USA market for North and Central regions; * Shock of the 1995 balance of payments crisis; *

  12. . Nominal wage is higher where market access is better. But why Ykt has a negative estimated coefficient?Meaning that nominal wage is higher where income is lower. Is the estimation capturing the fact that relative nominal wages have been rising in the periphery?

  13. σ(1-μ) > 1 So the no black hole condition (nbh) does not hold. What does this mean in H95? If thenbhdoes not hold, there will be dispersion of economic activity until real wage equality is reached (ωj = ω) in the long run, regardless the value of transport cost (τ > 1)

  14. …indeed there has been dispersion Population and manufacturing has been dispersing towards the periphery of Mexico City’s metropolitan area; it has also been moving North closer to USA market. Cd. de México

  15. An alternative specification? Using a similar reduced form derived this time from Krugman (1991) and not from Helpman (1995). * Does the no-black-hole condition still not holds? * Are the structural parameter estimations consistent with those obtained with Hanson-Helpman equation?

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