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You are on page 1of 19

www.elsevier.com/locate/jue

preferences: An explanation of segregation

Dao-Zhi Zeng a,b,∗

a Graduate School of Management, Kagawa University, Kagawa, 760-8523, Japan

b Center for Research of Private Economy, Zhejiang University, Zhejiang 310027, China

Available online 12 March 2007

Abstract

The Tiebout hypothesis (residential choice depends solely on local public goods) is extensively applied

to explain geographic segregation, and the related literature finds that residents are segregated according

to their heterogeneous preferences for public goods. This paper further examines the heterogeneous prefer-

ences for private goods in a spatial economy without public goods. Specifically, we employ a new economic

geography framework in which the heterogeneous preferences of mobile workers on manufactured goods

are incorporated. The rigorous general equilibrium analysis conducted here shows that the increasing-

returns technology and monopolistic competition form a mechanism endogenously leading to persistent

residential segregation. There is an evolving path with decreasing transport costs in which the two types of

mobile workers are segregated, while two industries evolve from dispersion to agglomeration.

© 2007 Elsevier Inc. All rights reserved.

1. Introduction

Spatial segregation is evident in a lot of cities in the United States (see [6,7,19]). While the

traditional meaning of segregation in the USA is the separation of Blacks and Whites, the United

E-mail address: zeng@gsm.kagawa-u.ac.jp.

0094-1190/$ – see front matter © 2007 Elsevier Inc. All rights reserved.

doi:10.1016/j.jue.2007.02.004

D.-Z. Zeng / Journal of Urban Economics 63 (2008) 306–324 307

States Census 2000 reveals that this issue has been complicated by new forms of Latino and

Asian separateness and mixing.

In economics, spatial segregation is widely interpreted by the Tiebout theory [27] on local

public goods and its counterpart in the theory of clubs (see the original paper of Buchanan [4]

and Scotchmer’s survey papers [20,21]). The literature examines Tiebout’s conjecture that effi-

cient provision of public goods is realized in an economy where people “vote with their feet.”

It turns out that the answer rests on a number of assumptions. For example, when there is no

benefit in having people of different skills or cultures together in one community, a group of

individuals with heterogeneous preferences would be better off forming a separate club for each

homogeneous preference group (see Berglas [2], Brueckner [3], Conley and Wooders [5]).

While local policies clearly matter for residential choice, a paper of Rhode and Strumpf [19]

reports that long-run trends in geographic segregation are inconsistent with the simple Tiebout

theory. Instead, employment and other factors are more important. In other words, non-Tiebout

incentives are perhaps the driving forces in residential decisions.

To find such a non-Tiebout incentive, this paper examines a spatial economy without public

goods. Specifically, we focus on people’s heterogeneous preferences for private goods only. Con-

sumers in the real world typically hold heterogeneous preferences for private goods. With respect

to cars, the Thais like pickup trucks while the Indonesians like minivans. This paper shows that

the preference heterogeneity is another reason for the persistent segregation. The importance of

heterogeneous preferences is already noted by Scott [22], who finds that while external barriers

(e.g. housing discrimination based on race) are still viewed as the main cause of black–white

segregation, preference plays a larger role among Asians. In fact, there are districts, frequently

referred to as “China Town,” which are populated primarily by Asians in many large US cities.

Numerous varieties of goods preferred by Asian people agglomerate there. Preference plays a

more important role for segregation in an ethnically homogeneous country, such as Japan. For

example, the people in Kitakata City of Fukushima Prefecture have a preference for Ramen,

a kind of Chinese noodles, while people in the Kagawa Prefecture prefer Udon, a Japanese noo-

dle.

Since there is a wide variety of private goods in the real world, the differences in preferences

deserve more attention in segregation research. The findings in this research will fill this theo-

retical gap by showing how heterogeneous preferences lead to the segregation of consumers and

industries. The results may clarify why the leading automaker Toyota selected Indonesia as its

global production base for minivans and Thailand for pickup trucks,1 and how the difference

in preferences between Kitakata and Kagawa people in Japan has resulted in the production of

the well-known Kitakata–Ramen and Sanuki–Udon (Sanuki being another name given to Ka-

gawa).

It was not easy to formulate a general-equilibrium model for the examination of heteroge-

neous preferences for various private goods, but the techniques devised in the framework of the

new economic geography (NEG) have made it possible. NEG is concerned with how agglom-

eration is derived from monopolistic competition, increasing-returns technology, and transport

costs. Extensive reviews on this subject can be found in the book of Fujita et al. [9] and the

survey paper of Fujita and Mori [10]. The rapid development in recent years makes this research

area a mainstream of trade theory and regional science. Unfortunately, due to model tractability,

business-in-asia.com/auto_article2.html.

308 D.-Z. Zeng / Journal of Urban Economics 63 (2008) 306–324

there are only a few papers considering heterogeneous residents in the NEG literature so far. Fo-

cusing on non-market factors, Tabuchi and Thisse [24] and Murata [15] find that heterogeneous

preferences for residential location induce a strong dispersion force. Another paper of Glazer

et al. [11] places the heterogeneous preferences of commodities into their framework, but the

transport costs are assumed to be sufficiently high to make consumers buy goods locally and

the workers are immobile. Therefore, the segregation and industrial evolution pattern due to the

heterogeneity of the population remains unclear.

By reconstructing the footloose entrepreneur model of Ottaviano [16] and Forslid and Otta-

viano [8], this paper incorporates the heterogeneity of mobile workers into the NEG framework.

Specifically, there are two symmetric regions with the same number of unskilled workers who

are immobile across regions and work in the traditional sector. In contrast, there are two types

of mobile workers who work in the manufacturing sector. There are also two industries in the

manufacturing sector. Different types of workers have the same productivity in the manufactur-

ing production, but they have different preferences for two types of industrial goods. Therefore,

a firm of a particular type prefers a location with more consumers of the same type. However,

since all workers consume both types of industries goods, the two industries are unlikely to ag-

glomerate even if the workers are separated when the transport costs are high.

A prominent equilibrium is the distribution of full dispersion, in which two types of mobile

workers and two industries equally disperse in two regions. However, our rigorous general-

equilibrium analysis shows that this equilibrium is unstable. Intuitively, when a worker migrates,

the destination market becomes bigger, which increases the demand and encourages firms to

move (the so-called “backward linkage” in the literature). However, if a firm follows the moving

worker, then the competition of firms leads to a reduction in the local price index, which encour-

ages the moving worker but discourages the moving firm. In the original core-periphery model,

the move of homogeneous workers automatically implies the move of homogeneous firms. The

two opposite forces are synthesized as the result of agglomeration (respectively, dispersion) when

transport costs are small (respectively, large). In contrast, workers and firms are heterogeneous

in our framework. The move of a worker does not automatically imply the move of firms of one

type. On the contrary, two types of firms follow the moving worker in proportion to the new mar-

ket demand, which encourages further move of the same type workers (the so-called “forward

linkage”). As a result, the increasing-returns technology and monopolistic competition form a

mechanism endogenously leading to persistent residential segregation, and a consumer lives in a

region in which other consumers share the same preferences. This is true even if the difference

between the two types of workers is small.

Previewing the equilibrium, there is an evolving path with decreasing transport costs in which

two types of workers are segregated in two regions and two types of industry separate gradually.

Two industries do not separate for large transport costs because of the local demands. However,

the “home market effect” occurs in the sense that each industry concentrates in the region with a

higher demand for its products but the distribution ratio is higher than the ratio of local demands.

The paper is constructed as follows. The basic model is established in Section 2. In Sec-

tion 3, we show that there is no stable interior equilibrium in which two types of mobile workers

disperse. Then we examine all possible corner equilibria and see how industries evolve with de-

creasing transport costs. Although the full agglomeration is also possible for sufficiently small

transport costs, it is unlikely to occur because the evolving path of segregation equilibria is con-

tinuous. Finally, Section 4 concludes the paper by indicating that the preference heterogeneity is

a fundamental reason but not a unique one for segregation.

D.-Z. Zeng / Journal of Urban Economics 63 (2008) 306–324 309

2. Brief setup

We extend the footloose entrepreneur model of Ottaviano [16] and Forslid and Ottaviano

[8] to the case of two kinds of population and two industries. We make this choice because

this framework retains most features of the first core-periphery model of Krugman [13] and is

analytical solvable.

Specifically, we consider the economy of two symmetric regions 1 and 2 with the same num-

ber L of unskilled workers who may work in the traditional sector. There are two industries x

and y in the manufacturing sector. Two kinds of skilled workers are mobile across these two re-

gions. The population of each type is the same H . For simplicity, all skilled workers are involved

in manufacturing production and their productivity in any industry is supposed to be the same.2

Call the unskilled workers type 0, and two kinds of mobile workers types x and y. Those workers

have heterogeneous preferences. Specifically, the preference of the representative consumer of

type k ∈ {0, x, y} in region i ∈ {1, 2} is captured by the following utility functions:

μ 1−μ

Ui0 = Xi0 Yi0 2 A0i ,

x μη x μ(1−η) x 1−μ y y μ(1−η) y μη y 1−μ

Ui = X i

x

Yi Ai , Ui = X i Yi Ai ,

where Aki is the consumption of the traditional good in region i of a type k consumer, and

σ σ

σ −1 σ −1

σ −1 ky σ −1

Xik = dikx (s) σ ds , Yik = di (s) σ ds , k ∈ {0, x, y}

s∈N x s∈N y

represent the consumption of two types of manufactured goods. In the above expressions, N x

(respectively, N y ) is the mass of variety in industry x (respectively, industry y), and dikx (s) (re-

ky

spectively, di (s)) is the consumption of a typical good in industry x (respectively, industry y)

by a consumer of type k ∈ {0, x, y}. Parameter μ represents the relative importance of the man-

ufactured goods and the traditional good, while η represents the relative consumption of two

industries inside the manufacturing sector. A type k ∈ {x, y} mobile worker enjoys an absolute

advantage over another type of mobile workers in the consumption of the type k industry goods.

Finally, the parameter σ (>1) is both the elasticity of demand of any variety and the elasticity of

substitution between any two varieties within an industry. Note that the unskilled workers do not

differentiate the production of two industries, which keeps the symmetric role of the immobile

factor as an NEG model. In addition, since the productivity is the same for both types of mobile

workers, a manufacturing firm is related to a particular type of worker only through its market.

The two industries, x and y, are modeled in a symmetric way. Their only difference is the

preference of the mobile workers for them. We assume

1

<η<1 (1)

2

to reflect the fact that type k mobile workers prefer type k industry goods more than another type.

2 Some authors consider the case of heterogeneous productivity, e.g., Amiti and Pissarides [1] and Zeng [29]. Particu-

larly, Zeng [29] has shown that, in the case of multiple types of skilled workers with different skills, the workers of the

same type are likely to agglomerate in a region when transport costs decrease. Therefore, this paper focuses on the case

of homogeneous productivity.

310 D.-Z. Zeng / Journal of Urban Economics 63 (2008) 306–324

Let nkj be the set of all varieties in industry k ∈ {x, y} produced in region j ∈ {1, 2}. Given

the price pjki (s) of variety s ∈ nkj consumed in region i, the CES demand djki1 k2 (s) of variety s

consumed by workers of type k1 in location i is calculated as

pjxi (s)−σ μ 0 pj i (s)−σ μ 0

y

0y

dj0xi (s) = I , dj i (s) = y I , (2)

(Pix )1−σ 2 i (Pi )1−σ 2 i

pjxi (s)−σ pj i (s)−σ

y

xy

djxxi (s) = μηIix , dj i (s) = y μ(1 − η)Iix , (3)

(Pix )1−σ (Pi )1−σ

pjxi (s)−σ pj i (s)−σ

y

yx y yy y

dj i (s) = μ(1 − η)Ii , dj i (s) = y μηIi , (4)

(Pix )1−σ (Pi )1−σ

where

1

1−σ

Pix = piix (s)1−σ ds + pjxi (s)1−σ ds ,

s∈nxi s∈nxj

1

1−σ

y y y

Pi = pii (s)1−σ ds + pj i (s)1−σ ds

y y

s∈ni s∈nj

are the price indices and Iik is the local income of type k in region i determined by

I10 = w10 L, I20 = w20 L, for k = 0.

In the above expressions, wi and wi0 are the wages of skilled and unskilled workers in region i,

respectively. Since both types of skilled workers are assumed to have the same productivity, their

wages are the same.

Let

yk

djki (s) = dj0ki (s) + djxki (s) + dj i (s) (5)

be the total demand of variety s in industry k produced in region j and consumed by all con-

sumers in region i.

Firms in industries x and y are monopolistically competitive and employ any type of skilled

workers and unskilled workers under increasing returns to scale. Specifically, in order to produce

q(s) units of variety s, a firm incurs a fixed input requirement of one unit of any type of skilled

worker and a marginal input requirement of βq(s) units of unskilled workers, so the total cost is

TCi (s) = wi + wi0 βq(s).

Note that the firms of two industries have no productivity difference. Let λx and λy be the popu-

lation shares of type x and y workers in region 1, respectively. For convenience, we also denote

y y

the numbers of firms in two regions by nx1 , nx2 , n1 , and n2 . Then we have

y y

y y

nx1 + nx2 = N x , n1 + n2 = N y .

D.-Z. Zeng / Journal of Urban Economics 63 (2008) 306–324 311

Therefore, N x + N y = 2H .

Without loss of generality, we suppose that one unskilled worker produces one unit of tradi-

tional good and take the traditional good as the numéraire. Then,

piA = wi0 = 1

holds in any region i.

Assume Samuelson’s iceberg form of interregional transportation costs: τ > 1 units of the

manufactured good must be shipped for one unit to reach the other region. A typical manufactur-

ing firm located in region i determines prices by maximizing profit

x

(s)dijx (s) − β diix (s) + τ dijx (s) − wi ,

y y y y y y y

Πi (s) = pii (s)dii (s) + pij (s)dij (s) − β dii (s) + τ dij (s) − wi .

According to (5), the first-order condition of maximization gives

βσ τβσ y βσ y τβσ

piix (s) = , x

pij (s) = , pii (s) = , pij (s) = .

σ −1 σ −1 σ −1 σ −1

Therefore, the price index is

βσ x 1 y βσ y y 1

Pix = ni + φnxj 1−σ , Pi = ni + φnj 1−σ , (6)

σ −1 σ −1

where φ = τ 1−σ ∈ (0, 1].

Due to the free-entry, the profit of any firm is zero. Therefore, the wage wi of skilled workers

in region i is determined by

β[diix (s) + τ dijx (s)]

wi = piix (s)diix (s) + pij

x

(s)dijx (s) − β diix (s) + τ dijx (s) = (7)

σ −1

for working in firms of industry x and

y y

y y y y y y

β[dii (s) + τ dij (s)]

wi = pii (s)dii (s) + pij (s)dij (s) − β dii (s) + τ dij (s) = (8)

σ −1

for working in firms of industry y.

Given the population shares λx and λy in region 1, the expenditure Eik in region i for industry

k goods is calculated as

μ

E1x = L + w1 λx H μη + w1 λy H μ(1 − η),

2

y μ

E1 = L + w1 λx H μ(1 − η) + w1 λy H μη,

2 (9)

μ

E2 = L + w2 (1 − λx )H μη + w2 (1 − λy )H μ(1 − η),

x

2

y μ

E2 = L + w2 (1 − λx )H μ(1 − η) + w2 (1 − λy )H μη.

2

y y

Let xi = diix (s) + τ dijx (s) and yi = dii (s) + τ dij (s) be the amounts of production of any variety

s of industries x and y in region i (evidently, xi and yi do not depend on the name s due to the

symmetry across varieties). In the case of nonempty production, (2)–(4) give

312 D.-Z. Zeng / Journal of Urban Economics 63 (2008) 306–324

x )−σ

(p11 x )−σ

(p12

x1 = d11

x

+ τ d12

x

= E x

+ τ Ex

(P1x )1−σ 1 (P2x )1−σ 2

σ −1 E1x φE2x

= + , (10)

βσ nx1 + φnx2 φnx1 + nx2

σ −1 E2x φE1x

x2 = + x , (11)

βσ nx2 + φnx1 n1 + φnx2

y y

σ −1 E1 φE2

y1 = y y + y y ,

βσ n1 + φn2 φn1 + n2

y y

σ −1 E2 φE1

y2 = y y + y y . (12)

βσ n2 + φn1 n1 + φn2

The above equations show that the demands depend on the distribution of workers, firms, and

wages of workers. Although they appear to be complicated, they make it possible to conduct a

general equilibrium analysis.

3. Equilibrium analysis

In order to study the spatial equilibrium and its stability, following established traditions in

economic geography, we assume that markets for goods adjust instantaneously, while interre-

gional migration of firms and workers is relatively slow, implying that wages adjust much faster

than the labor share. The dynamics of labor shares is simply as follows

⎧ x

⎪

⎪

dλ w1 w2

⎨ dt = V (λ , λ ) ≡ (P x )μη (P y )μ(1−η) − (P x )μη (P y )μ(1−η) ,

x x y

⎪

1 1 2 2

(13)

⎪

⎪ dλ y w 1 w 2

⎪

⎩ = V (λ , λ ) ≡ x μ(1−η) y μη − x μ(1−η) y μη .

y x y

dt (P1 ) (P1 ) (P2 ) (P2 )

The stability of interior and corner equilibria in such dynamics is extensively discussed

in [26,28].

Similar to the case of homogeneous population, there are at most three interior equilibria.

However, the different conclusion is that none of them is stable.

This can be shown as follows. Note that, in an interior equilibrium, we have λx , λy ∈ (0, 1).

According to (13), the real wages working in any industry and in any region must be the same at

the equilibrium

w1 w2

y = y , (14)

(P1x )μη (P1 )μ(1−η) (P2x )μη (P2 )μ(1−η)

w1 w2

x μ(1−η) y μη = x μ(1−η) y .

(P1 ) (P1 ) (P2 ) (P2 )μη

From (6), the above relation implies that the ratio of two industries in two regions are the same:

y y

nx1 /n1 = nx2 /n2 = N x /N y . Meanwhile, non-empty production of two industries in both regions

requires wi = βxi /(σ − 1) = βyi /(σ − 1) for i = 1, 2 from (7) and (8). Then we have

D.-Z. Zeng / Journal of Urban Economics 63 (2008) 306–324 313

y

(1 − φ 2 )E2x (1 − φ 2 )E2

σ (w2 − φw1 ) = = ,

(1 − λ + φλ)N x (φλ + 1 − λ)N y

y

(1 − φ 2 )E1x (1 − φ 2 )E1

σ (w1 − φw2 ) = = ,

[λ + φ(1 − λ)]N x [λ + φ(1 − λ)]N y

y y y

where λ = nx1 /N x = n1 /N y . The above equalities imply that E1 = E1x N y /N x and E2 =

E2x N y /N x . On the other hand, according to (9), the total expenditures of x and y in two re-

y y

gions with respect to the local wages are balanced: E1x /w1 + E2x /w2 = E1 /w1 + E2 /w2 . This

is because the two industries are symmetric. The balance equality can be rewritten as

Ny w1 x

1− x E1 +

x

E = 0.

N w2 2

Since E1x , E2x and w1 /w2 are all positive, it follows that N x = N y (= H ), and then, nx1 =

y y y

n1 = λH , nx2 = n2 = (1 − λ)H . Furthermore E1x = E1 implies the same population shares

λ = λ (= λ).

x y

On the other hand, wi = βxi /(σ − 1) gives the expressions for w1 and w2 as follows

μ L 2σ φλ + [σ − μ + (σ + μ)φ 2 ](1 − λ)

w1 = ,

σ − μ 2H φσ [λ2 + (1 − λ)2 ] + [σ − μ + (σ + μ)φ 2 ]λ(1 − λ)

μ L 2σ φ + λ(1 − φ)[σ − μ − (σ + μ)φ]

w2 = ,

σ − μ 2H φσ [λ2 + (1 − λ)2 ] + [σ − μ + (σ + μ)φ 2 ]λ(1 − λ)

and (14) says that λ is a solutions of

μ

λ + φ(1 − λ) 1−σ 2σ φ + (1 − λ)(1 − φ)[σ (1 − φ) − μ(1 + φ)]

= . (15)

1 − λ + φλ 2σ φ + λ(1 − φ)[σ (1 − φ) − μ(1 + φ)]

We have obtained the same wage expressions for the homogeneous population model (see [8,

(16)]). Ottaviano [16, Appendix A] and Forslid and Ottaviano [8, p. 236] have shown that there

are at most three roots in (15). Among them, symmetric equilibrium λ = 1/2 is stable for small

φ and two asymmetric equilibria are always unstable. Since the stability conditions of (13) in our

heterogeneous population model are more stringent than that of homogeneous population model,

two asymmetric equilibria remain to be unstable here. Surprisingly, Appendix A shows that the

symmetric equilibrium is also unstable when workers are heterogeneous. Therefore, we conclude

as follows.

Proposition 1. There is no stable interior equilibrium, in which two types of mobile workers

disperse.

Intuitively, the instability results from the fact that heterogeneous preferences of workers im-

ply weaker competition effect among firms. In the framework of homogeneous workers, the

move of a worker is linked with the move of a firm. Although the moving worker increases the

destination market, the moving firm increases the competition which decreases the local prices.

Therefore, the net benefit is not definitely positive, particularly when transport costs are large.

However, when the workers and industries are heterogeneous, the move of a worker is not linked

with the move of a firm in the same type industry. On the contrary, firms in both industries may

follow the moving worker in proportion to the new market demand. This decreases the compet-

itive effects, and does not discourage the moving firms to a great degree. At the same time, the

moving worker is encouraged by the lower price indices and he/she is followed by more workers

of the same type. This finally causes the instability of the interior equilibrium.

314 D.-Z. Zeng / Journal of Urban Economics 63 (2008) 306–324

Appendix B further rejects the possibility of a stable asymmetric equilibrium in which only

one type of skilled worker disperses. Therefore, only two kinds of population distributions are

possible:

(ii) both types of worker agglomerate in the same region.

Without loss of generality, let the type x workers be in region 1 and the type y workers in

y y

region 2. In notation, λx = 1, λy = 0. Then, nx2 = N x − nx1 , n1 = H − nx1 and n2 = H − N x + nx1

hold.

The two industries are not necessarily separated because all workers consume all goods of

both industries. If both industries disperse in two regions, then (7) and (8) give

βx1 βy1 βx2 βy2

w1 = = , w2 = = .

σ −1 σ −1 σ −1 σ −1

The only solution to the above equations is

μL

w1 = w 2 = , (16)

(σ − μ)H

σ (1 − φ) + (2η − 1)μ(1 + φ)

nx1 = H, (17)

2σ (1 − φ)

y σ (1 − φ) + [2(1 − η) − 1]μ(1 + φ)

n1 = H,

2σ (1 − φ)

N x = N y = H.

Two industries disperse iff nx1 is in (H /2, H ), which is equivalent to

N σ − H (2η − 1)μ σ − μ(2η − 1)

φ< = . (18)

H (2η − 1)μ + N σ σ + μ(2η − 1)

The skilled workers have no incentive to migrate because their real wages are higher

w1∗ w2∗

y > y ,

(P1x )μη (P1 )μ(1−η) (P2x )μη (P2 )μ(1−η)

w1∗ w2∗

y < y .

(P1x )μ(1−η) (P1 )μη (P2x )μ(1−η) (P2 )μη

To check the stability of this equilibrium, we further investigate whether a firm benefits from

switching its production between x and y industries or moving between two regions. Since

∂x1 ∂y1 ∂x2 ∂y2

< 0, y < 0, > 0, y > 0,

∂nx1 ∂n1 ∂nx1 ∂n2

hold at the equilibrium iff (18) is satisfied, no firms switch or move, and the equilibrium is stable

under (18).

D.-Z. Zeng / Journal of Urban Economics 63 (2008) 306–324 315

Note that (17) increases with η. Therefore, for more heterogeneous preferences, the industries

agglomerate more intensively. Meanwhile, (17) increases with φ, which means that the industries

agglomerate more for smaller transport costs.

Krugman [12] uses a framework of heterogeneous preferences framework to examine trade

theory. His model also involves two groups of consumers but each consumer is assumed to con-

sume only one type of industrial goods. Furthermore, the distribution of consumers is given

exogenously. Krugman finds the so-called “home market effect,” in which each industry con-

centrates in the country with a higher demand for its products. In contrast, our model assumes

that each consumer consumes both types of industrial goods to various degrees and the con-

sumers segregate endogenously. The increasing-returns technology employed here allows us to

reproduce the home market effect. In fact, the ratio of demands of x industry in regions 1 and 2

is

μηw1 H + μ2 w10 L σ + (2η − 1)μ

= ,

μ(1 − η)w1 H + μ 0

2 w1 L

σ − (2η − 1)μ

where w1 is given in (16). The reader can check that the ratio above is smaller than nx∗ x∗

1 /n2 ,

where n1 is given in (17) and n2 = N − n1 . In other words, it implies that region 1 is a net

x∗ x∗ x∗

Next, we turn to the examination of the equilibrium of separating industries. This full separa-

tion equilibrium is described as

y

λx = 1, λy = 0, nx1 = n2 = N x = N y = H.

Solving the equations of w1 = βx1 /(σ − 1), w2 = βy2 /(σ − 1), (10) and (12), we obtain

μL

w1 = w 2 = .

(σ − μ)H

The price indices in two regions are calculated as follows

βσ 1 y βσ 1

P1x = H 1−σ , P1 = (φH ) 1−σ ,

σ −1 σ −1

y βσ 1 βσ 1

P2 = H 1−σ , P2x = (φH ) 1−σ .

σ −1 σ −1

Then, with respect to the real wages,

w1 w2 w1 w2

x μη y μ(1−η) > x μη y μ(1−η) , x μ(1−η) y μη < x μ(1−η) y

(P1 ) (P1 ) (P2 ) (P2 ) (P1 ) (P1 ) (P2 ) (P2 )μη

hold at the equilibrium for all φ ∈ (0, 1) from (1). Therefore, none of the skilled workers has the

incentive to migrate.

To check the stability of this equilibrium, we investigate whether firms benefit from switching

their production between industries and/or moving between two regions. For example, if an x-

firm moves from region 1 to region 2, then its profit becomes

βx2 Lμ(1 − φ)[N σ (1 − φ) − H (2η − 1)μ(1 + φ)]

− w2 = .

σ −1 2σ Nφ(σ N − μH )

To be stable, the above expression should be non-positive, which is equivalent to

N σ − H (2η − 1)μ σ − μ(2η − 1)

φ = . (19)

H (2η − 1)μ + N σ σ + μ(2η − 1)

316 D.-Z. Zeng / Journal of Urban Economics 63 (2008) 306–324

Other kinds switching and moving are also prevented under (19). Therefore, the separating dis-

tribution is a stable equilibrium when τ is small enough. Note that the RHS of (19) is positive

since σ > 1 > μ.

Three remarks are given here.

First, (19) is the complement of (18). Therefore, we obtain a continuous path with respect

to decreasing τ . There is no drastic change of distribution patterns in the case of heterogeneous

preferences.

Second, the RHS of (19) is related to η (actually, it decreases with η). Therefore, for more

heterogeneous preferences, the full separation distribution is more likely. In other words, the less

heterogeneous the workers are, the less likely industries are to agglomerate. Particularly, when

η = 1/2, the RHS is 1, and the above expression is always false so that the industries do not

separate. This shows that, when the workers are homogeneous, the distribution of two separating

industries is not a stable equilibrium. This is consistent with the results in the research of multiple

industries in Tabuchi and Thisse [25] and Zeng [29].

Third, the whole manufacturing sector appears dispersing in the full separation distribution.

However, it is different from the full dispersing distribution because each type of industry is

agglomerated. This verifies that the difference between the re-dispersion (when τ is small) and

the dispersion (when τ ) is large, as shown in [29].

The above results are summarized as follows.

Proposition 2. (i) Separating workers and dispersing industries is stable if τ is large enough to

satisfy (18). (ii) Full separation is stable if τ is small enough so that (18) fails.

Although the dispersing equilibrium in the standard core-periphery model is replaced by the

two equilibria of Proposition 2, the full agglomeration is again a possible distribution in this new

model. Without loss of generality, we examine the distribution of agglomeration in region 1:

y∗

λx∗ = λy∗ = 1, nx∗ 1 = n1 = N = N = N . After solving equations w1 = βx1 /(σ − 1) =

x y

∗ μL ∗ μL 1 + φ 2 φμ

w1 = , w2 = + .

(σ − μ)H σH 2φ σ −μ

To prevent the migration of type x workers from region 1 to region 2, it should hold that

w1∗ w2∗

x y − x y 0,

(P1 )μη (P1 )μ(1−η) (P2 )μη (P2 )μ(1−η)

or, equivalently,

μ σ +μ 2 σ −1−μ

1− + φ − 2φ σ −1 0. (20)

σ σ

It is easy to find that (20) is sufficient and necessary to prevent all possible migration and ensures

the stability of this corner equilibrium.

It is noteworthy that the LHS in the above expression is the same as (25) of Forslid and Otta-

viano [8], which is not related to η. This implies that the distribution of agglomerated industries

and residents does not depend on the preference heterogeneity. It can be shown that the LHS of

(20) increases with φ if σ 1 + μ. In this case, (20) is always true and the economy always

D.-Z. Zeng / Journal of Urban Economics 63 (2008) 306–324 317

agglomerates in a region. Therefore, Forslid and Ottaviano [8] impose the no-black-hole condi-

tion3 σ > 1 + μ. Under the no-black-hole condition, (20) is true when φ is large enough (or, τ is

small enough). For example, when σ = 5, μ = 0.3, L = 10, H = 4, (20) is true iff φ > 0.762.

To summarize, we obtain two evolving paths. One involves the segregation of workers for

all τ , while the other involves full agglomeration for small τ . See Fig. 1.

Under the no-black hole condition, there are two possible stable equilibria for small τ : full

separation of both workers and industries (FS) and full agglomeration (FA). For a comparison,

Appendix C provides a utility calculation for all workers in the FS and FA equilibria. The results

are as follows

Skilled workers FA>FS

If the social welfare function is the total sum of all the utilities of individuals, then it can be

shown that the FA equilibrium is better than the FS equilibrium.

Although the full agglomeration is better than the full separation except for the unskilled

workers in the periphery region, the latter is more likely for two reasons. First, since the evolving

path of Proposition 2 is continuous, the FS is chosen by history [14] without exogenous force

from policy makers. Second, more importantly, the full agglomeration turns out to be unstable

if the agglomeration diseconomy due to intra-city congestion is included [23], and/or the trans-

port costs of the traditional goods are positive [17], and/or the non-market factors of residential

behavior are included [15,24]. In contrast, the full separation equilibrium remains stable even if

those dispersion forces are included. This is because the numbers of residents in two regions are

the same in the full separation equilibrium.

4. Conclusion

Quigley [18] reviewed two fields, “urban agglomeration” and “neighborhood effects,” as the

prominent examples representing the renaissance in regional research. The former refers to

the NEG literature, and the latter refers to the research related to segregation. This paper is a

3 Note that our previous result of segregation does not depend on the no-black-hole condition.

318 D.-Z. Zeng / Journal of Urban Economics 63 (2008) 306–324

combination of both fields and provides an explanation of segregation by extending the foot-

loose entrepreneur model of [8] to incorporate the heterogeneity of workers. We show that the

increasing-returns technology and monopolistic competition form a mechanism endogenously

leading to persistent residential segregation. Specifically, there is a continuous path in which two

types of mobile workers are segregated and two industries evolve from dispersion to agglom-

eration separately with decreasing transport costs. Although the full agglomeration pattern is

possibly stable for small transport costs offers higher utilities for all except the unskilled work-

ers in the periphery region than the full separation equilibrium, the full agglomeration pattern is

unlikely to appear without exogenous force from a policy maker.

Despite the importance of heterogeneous preferences, research on it is almost limited to the

literature of the Tiebout theory, in which preferences with respect to local public goods are stud-

ied. The heterogeneous preference for private goods is hardly discussed in economic literature.

Therefore, this paper fills the theoretical gap.

Needless to say, preference heterogeneity for private goods is not a unique non-Tiebout in-

centive of segregation. For example, the heterogeneity of productivity is also one of the reasons.

By use of a multiple-industry model, in which the production in each industry requires a specific

skill owned by a specific type of worker, Zeng [29] shows that at most one industry disperses and

other industries agglomerate in a region for sufficiently small transport costs. Since the whole

manufacturing sector is dispersing, skill segregation is observed. Segregation in the real world is

much more complicated, and it is fair to say that more factors will need to be examined to fully

clarify segregation.

Acknowledgments

The author is indebted to the editor (Jan Brueckner), two anonymous referees, and to A. Kajii,

Y. Kanemoto, T. Mori, Y. Murata, R. Nakamura, K. Sasaki, Y. Sato, T. Tabuchi, H. Takatsuka and

X. Zhu for helpful suggestions and discussions. Further acknowledgment is due for the financial

support received from the Japanese Ministry of Education, Culture, Sports, Science, and Tech-

nology (Grand-in-Aid for Science Research 18530179), from Kagawa University (Exploratory

Research), and from Zhejiang University (CRPE Joint Research).

y y

nx2 = N x − nx1 , n1 = (λx + λy )H − nx1 , n2 = nx1 + (2 − λx − λy )H − N x ,

y y

∂nx2 ∂N x ∂nx1 ∂n1 ∂nx1 ∂n2 ∂nx1 ∂N x

= − , = H − , = − H − .

∂λx ∂λx ∂λx ∂λx ∂λx ∂λx ∂λx ∂λx

Because w1 , w2 , nx1 , N x are obtained from equations

(σ − 1)w1 (σ − 1)w2

= x1 = y1 , = x2 = y2 ,

β β

we have the following equations for ∂w1 /∂λx , ∂w2 /∂λx , ∂nx1 /∂λx and ∂N x /∂λx :

D.-Z. Zeng / Journal of Urban Economics 63 (2008) 306–324 319

∂w1 1 ∂w1 x

σ x = x H μ ηλ + (1 − η)λ + w1 H μη y

∂λ (n1 + φnx2 )2 ∂λx

x ∂nx1 ∂N x

× n1 + φn2 − E1 (1 − φ) x + φ x

x x

∂λ ∂λ

φ ∂w2

+ H μ (1 − λ )η + (1 − λ )(1 − η) − w2 H μη

x y

(φnx1 + nx2 )2 ∂λx

∂nx ∂N x

× φnx1 + nx2 − E2x (φ − 1) 1x + ,

∂λ ∂λx

∂w1 1 ∂w1

σ x = y y H μ (1 − η)λ + ηλ + w1 H μ(1 − η)

x y

∂λ (n1 + φn2 )2 ∂λx

y y y ∂nx ∂N x

× n1 + φn2 − E1 (1 − φ) H − 1x − φ x

∂λ ∂λ

φ ∂w2

+ y y 2 H μ (1 − λx )(1 − η) + (1 − λy )η

(φn1 + n2 ) ∂λ x

y y y ∂nx1 ∂N x

− w2 H μ(1 − η) φn1 + n2 − E2 (φ − 1) H − x − ,

∂λ ∂λx

∂w2 1 ∂w2

σ x = x H μ (1 − λ x

)η + (1 − λ y

)(1 − η) − w 2 H μη

∂λ (n2 + φnx1 )2 ∂λx

∂nx ∂N x

× nx2 + φnx1 − E2x (φ − 1) 1x +

∂λ ∂λx

φ ∂w1 x

+ x H μ λ η + λ y

(1 − η) + w 1 H μη

(n1 + φnx2 )2 ∂λx

∂nx ∂N x

× nx1 + φnx2 − E1x (1 − φ) 1x + φ x ,

∂λ ∂λ

∂w2 1 ∂w2

σ x = y y 2 H μ (1 − λx )(1 − η) + (1 − λy )η

∂λ (n2 + φn1 ) ∂λ x

x

y y y ∂n1 ∂N x

− w2 H μ(1 − η) n2 + φn1 − E2 (1 − φ) −H −

∂λx ∂λx

φ ∂w1 x

+ y y H μ λ (1 − η) + λ η + w1 H μ(1 − η)

y

(n1 + φn2 )2 ∂λx

y y y ∂nx ∂N x

× n1 + φn2 − E1 (1 − φ) H − 1x − φ x .

∂λ ∂λ

Solving the above four equations, we obtain

σ φ(3−4λ)

∂w1 Lμ(1 − φ) (σ +μ)φ−(σ −μ) − (1 − λ) (1 − φ)

2

= 2 ,

∂λx σφ

4H (σ − μ) (σ +μ)φ−(σ + λ(λ − 1)(1 − φ)

−μ)

σ φ(1−4λ)

∂w2 Lμ(1 − φ) (σ +μ)φ−(σ −μ) + λ2 (1 − φ)

= 2 ,

∂λx 4H (σ − μ) σφ

+ λ(λ − 1)(1 − φ)

(σ +μ)φ−(σ −μ)

320 D.-Z. Zeng / Journal of Urban Economics 63 (2008) 306–324

=

∂λ x 2σ (1 − φ)

2μφ

H (2η − 1)(2λ − 1)μφ λ(1 + φ) − (σ +μ)φ−(σ −μ)

+ ,

(σ 2 −μ2 )φ

2σ (1 − φ 2 ) [(σ +μ)φ−(σ −μ)]2

+ λ(1 − λ)

∂N x H (2η − 1)(2λ − 1)μφ[(σ − μ)2 − φ 2 (σ + μ)2 ]

=

∂λx 2σ (1 + φ){(σ 2 − μ2 )φ + λ(1 − λ)[(σ + μ)φ − (σ − μ)]2 }

at equilibrium λx = λy = λ, where λ is a solution of (15).

Similarly, we can obtain the derivatives with respect to λy . Their values at the symmetric

equilibrium λ = 1/2 are summarized as follows

∂w1 Lμ(1 − φ)[(σ + μ)φ − (σ − μ)] ∂w1 ∂w2 ∂w2 ∂w1

= = y, = y =− x ,

∂λx H (σ − μ)(1 + φ)[(σ + μ)φ + σ − μ] ∂λ ∂λx ∂λ ∂λ

y y

∂nx1 H [σ (1 − φ) + (2η − 1)μ(1 + φ)] ∂n1 ∂nx2 ∂n2 ∂nx1

= = y, = = − ,

∂λ x 2σ (1 − φ) ∂λ ∂λx ∂λy ∂λx

y y

∂nx1 ∂n1 ∂nx1 ∂nx2 ∂n2 ∂nx1 ∂N x

= = H − , = = − H, = 0.

∂λy ∂λx ∂λx ∂λy ∂λx ∂λx ∂λx

On the other hand, price indices are

βσ x 1 y βσ y y 1

Pix = ni + φnxj 1−σ , Pi = ni + φnj 1−σ , i, j = 1, 2, j = i.

σ −1 σ −1

Then,

y y

∂P1x 2(1 − φ)P1x ∂nx1 ∂P1 2(1 − φ)P1 ∂nx1

= , = H −

∂λ x (1 − σ )(1 + φ)H ∂λx ∂λx (1 − σ )(1 + φ)H ∂λx

hold at the equilibrium, and furthermore,

∂V x ∂ w1 w2

= −

∂λx ∂λx (P1x )μη (P1y )μ(1−η) (P2x )μη (P2y )μ(1−η)

1 2(1−φ)μw1 ∂n1

x ∂nx1

2 ∂w

∂λx + (σ −1)(1+φ)H η ∂λx + (1 − η)(H − ∂λx )

= y

(P1x )μη (P1 )μ(1−η)

2Lμ(P1x )−μη (P1 )μ(η−1)

y

=− δ xx ,

H (σ − μ)(σ − 1)σ (1 + φ)[(σ + μ)φ + σ − μ]

where

− 2σ φ σ (σ − 1) + 2μ2 (2η2 − 2η + 1)

Similarly,

D.-Z. Zeng / Journal of Urban Economics 63 (2008) 306–324 321

∂V x ∂ w1 w2

= y −

∂λy ∂λ (P1x )μη (P1y )μ(1−η) (P2x )μη (P2y )μ(1−η)

∂V x 2 2L(2η − 1)2 μ3

= − x μη y μ(1−η) ,

∂λ x (P1 ) (P1 ) H (σ − μ)(σ − 1)σ

∂V y ∂ w1 w2 ∂V x P1x μ(2η−1)

= − = ,

∂λx ∂λx (P1x )μ(1−η) (P1y )μη (P2x )μ(1−η) (P2y )μη ∂λy P1y

∂V y ∂ w1 w2 ∂V x P1x μ(2η−1)

= − = .

∂λy ∂λy (P1x )μ(1−η) (P1y )μη (P2x )μ(1−η) (P2y )μη ∂λx P1y

Therefore, the symmetrical equilibrium is stable if and only if

δ xx > 0, (A.2)

∂V x ∂V x

∂λx 16L2 (2η − 1)2 μ4 (1 − φ)[μ2 + (σ − 1)σ + μ(2σ − 1)]

∂λy =

∂V y ∂V y H 2 (σ − μ)2 (σ − 1)2 σ (1 + φ)[(σ + μ)φ + σ − μ]

∂λx ∂λy

μ + μ2 − 2μσ + (σ − 1)σ 1

× φ− 2 > 0. (A.3)

μ + (σ − 1)σ + μ(2σ − 1) (P1 P1y )μ

x

However, inequalities (A.2) and (A.3) are inconsistent for any φ ∈ [0, 1]. In fact, let

μ + μ2 − 2μσ + (σ − 1)σ

φ0 = ,

μ2 + (σ − 1)σ + μ(2σ − 1)

which is smaller than 1. Then (A.3) is true if and only if φ ∈ (φ0 , 1]. On the other hand, from

(A.1) we know that δ xx is negative at φ = 1 and φ0 :

δ xx |φ=1 = −4(2η − 1)2 μ2 σ < 0,

4μ2 (1 − 2η)2 (σ − 1)(σ − μ)[μ2 + σ (σ − 1)]

δ xx |φ=φ0 = − < 0.

(σ + μ)(σ + μ − 1)2

Since the coefficient of φ 2 in (A.1) is positive, δ xx < 0 holds for all φ ∈ [φ0 , 1].

Appendix B. No stable equilibrium in which only one type of skilled workers disperses

(0, H ) workers of type x live in region 1 while all the remaining workers live in region 2. The

equilibrium conditions of the migration dynamics are

w1 w2

x μη y μ(1−η) = x y , (B.1)

(P1 ) (P1 ) (P2 ) (P2 )μ(1−η)

μη

w1 w2

x μ(1−η) y μη x μ(1−η) y .

(P1 ) (P1 ) (P2 ) (P2 )μη

The expenditures are specified as follows

μ y μ

E1x = L + w1 λx H μη, E1 = L + w1 λx H μ(1 − η),

2 2

μ

E2 = L + w2 (1 − λ )H μ(1 − η) + w2 H μη,

x x

2

y μ

E2 = L + w2 (1 − λx )H μ(1 − η) + w2 H μη.

2

322 D.-Z. Zeng / Journal of Urban Economics 63 (2008) 306–324

y

n1 (1 + γ x )λx H − γ x N x

γ =

y

y = . (B.2)

n2 (1 + γ x )(2 − λx )H − N x

We have the following two possible cases.

Case 1. Both industries locate in two regions.

In this case, wi = βxi /(σ − 1) = βyi /(σ − 1) hold for i = 1, 2 from (7) and (8). They are

written as

E1x φE2x

σ w1 = x + ,

[γ + φ(1 − γ x )]N x [(1 − γ x ) + φγ x ]N x

E2x φE1x

σ w2 = + x ,

[(1 − γ ) + φγ ]N

x x x [γ + φ(1 − γ x )]N x

y y (B.3)

E1 φE2

σ w1 = y + ,

[γ + φ(1 − γ y )](2H − N x ) [(1 − γ y ) + φγ y ](2H − N x )

y y

E2 φE1

σ w2 = + .

[(1 − γ y ) + φγ y ](2H − N x ) [γ y + φ(1 − γ y )](2H − N x )

Then we have six equations (B.1), (B.2) and (B.3) for five variables γ x , γ y , N x , w 1 and w 2 .

Furthermore, for λx ∈ (0, 1), the six equations are independently. Therefore, there is no solution

satisfying all equations and such an equilibrium does not exist.

Case 2. Only industry x locates in two regions.

y

In this case, we have nx1 = λx H , nx2 = N x − λx H , ny = 0 and n2 = 2H − N x = N y . We have

the following four independent equations:

βx1 βx2 βy2

w1 = , w2 = = , and (B.1),

σ −1 σ −1 σ −1

but three variables N x , w1 and w2 only. So there is no solution again.

The prices of industrial goods are

y βσ y τβσ

x

p11 (s) = p11 (s) = , x

p12 (s) = p12 (s) = ,

σ −1 σ −1

and the price indices are

y βσ 1 y βσ 1

P1x = P1 = H 1−σ , P2x = P2 = (φH ) 1−σ .

σ −1 σ −1

The skilled workers are all in region 1 with wage w1 = μL/(σ − μ)H . The consumption is given

as

μσ −1 1 μσ −1 1

X10 = Y10 = H σ −1 , X20 = Y20 = H σ −1 ,

2 βσ 2 τβσ

y μ2 ηL σ − 1 1 y μ2 (1 − η)L σ − 1 1

X1x = Y1 = H σ −1 , X1 = Y1x = H σ −1 ,

(σ − μ)H βσ (σ − μ)H βσ

D.-Z. Zeng / Journal of Urban Economics 63 (2008) 306–324 323

y μ(1 − μ)L

A01 = A02 = (1 − μ), Ax1 = A1 = .

(σ − μ)H

Then the utility levels are

μ μ

μσ −1 1 μσ −1 1

U10 = H σ −1 (1 − μ)1−μ , U20 = H σ −1 (1 − μ)1−μ τ −μ ,

2 βσ 2 βσ

1−μ μ

y μ(1 − μ)L μ L σ −1

2 1

U1 = U1 =

x

H σ −1 ημη (1 − η)μ(1−η) .

(σ − μ)H (σ − μ)H βσ

The social welfare is the total sum of the utilities

μ

σ −1 1

WFA = 2μ (1 − μ)

μ 1−μ

L H σ −1

βσ

−1−μ −μ μ

× 2 (1 + τ ) + η (1 − η)

μη μ(1−η)

.

σ −μ

Consider the distribution that two types of skilled workers and two types of industries are

y

separated in regions 1 and 2: λ1 = 1, λ2 = 0, nx1 = N x = n2 = N y = H .

The prices of industrial goods are

y βσ y τβσ

x

p11 (s) = p22 (s) = , x

p12 (s) = p21 (s) = ,

σ −1 σ −1

and the price indices are

y βσ 1 y βσ 1

P1x = P2 = H 1−σ , P1 = P2x = (φH ) 1−σ .

σ −1 σ −1

The wages are given by w1 = w2 = μL/(σ − μ)H , and the consumption is

μσ −1 1 μσ −1 1

X10 = Y20 = H σ −1 , X20 = Y10 = H σ −1 ,

2 βσ 2 τβσ

y μ ηL σ − 1

2 1 y μ2 (1 − η)L σ − 1 1

X1x = Y2 = H σ −1 , X2 = Y1x = H σ −1 ,

(σ − μ)H βσ (σ − μ)H τβσ

y μ(1 − μ)L

A01 = A02 = (1 − μ), Ax1 = A2 = .

(σ − μ)H

Then the utility levels are

μ

μσ −1 1 μ

U1 = U 2 =

0 0

H σ −1 (1 − μ)1−μ τ − 2 ,

2 βσ

μ

μ(1 − μ)L 1−μ μ2 L σ − 1 1

H σ −1 ημη (1 − η)μ(1−η) τ −μ(1−η) .

y

U1x = U2 =

(σ − μ)H (σ − μ)H βσ

The social welfare is the total sum of the utilities

μ

σ −1 1

WFS = 2μμ (1 − μ)1−μ L H σ −1

βσ

μ μ

× 2−μ τ − 2 + ημη (1 − η)μ(1−η) τ −μ(1−η) .

σ −μ

324 D.-Z. Zeng / Journal of Urban Economics 63 (2008) 306–324

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