November 2003

IZA DP No. 939: Acquisition of Skills, Education Subsidies, and Agglomeration of Firms

published in: Journal of Urban Economics, 2006, 59 (3), 420-439

An analytically solvable model of new economic geography is developed. Acquisition of skills is costly for workers but it allows them to earn wages that are larger than those of the unskilled. Moreover, skills acquisition can be subsidized by a regional government. For large transport costs, firms spread more or less evenly between regions, their precise location being determined by the level of education subsidies. For low transport costs, firms agglomerate 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 of transport costs.