Acquisition of Skills, Education Subsidies, and Agglomeration of Firms

Abstract

An analytically solvable model of new economic geography is developed. Acquisition of skillsis costly for workers but it allows them to earn wages that are larger than those of theunskilled. Moreover, skills acquisition can be subsidized by a regional government. For largetransport costs, firms spread more or less evenly between regions, their precise locationbeing determined by the level of education subsidies. For low transport costs, firmsagglomerate in one region. We also identify equilibria with partial agglomeration of firms.Finally, we show that the incentives to subsidy education largely depend on the level oftransport costs.

Keywords: education, economic geography, subsidies

JEL Classification: F12, F15, J51, R12