Agglomeration under Forward-Looking Expectations:
Potentials and Global Stability

Daisuke Oyama
Graduate School of Economics, Hitotsubashi University


This paper considers a class of migration dynamics with forward-looking agents in a multi-country solvable variant of the core-periphery model of Krugman (Journal of Political Economy 99 (1991)). We find that, under a symmetric externality assumption, our static model admits a potential function, which allows us to identify a stationary state that is uniquely absorbing and globally accessible under the perfect foresight dynamics whenever the degree of friction in relocation decisions is sufficiently small. In particular, when trade barriers are low enough, full agglomeration in the country with the highest barrier is the unique stable state for small frictions. New aspects in trade and tax policy that arise due to forward-looking behavior are discussed. Journal of Economic Literature Classification Numbers: C61, C62, C73, F12, R12, R23.
Key Words: economic geography; agglomeration; perfect foresight dynamics; history versus expectations; stability; potential game; equilibrium selection.

Regional Science and Urban Economics 39 (2009), 696-713. PDF file (PDF file submitted for proof correction)
First draft: March 28, 2006; this version: May 14, 2009. PDF file

Former title: Potential Methods in a Core-Periphery Model with Forward-Looking Expectations