The footloose entrepreneur model with three regions

We study an analytically solvable version of Krugman’s Core-Periphery model extended to three regions. This is the 3-region Footloose Entrepreneur model based on the 2- region version by Forslid and Ottaviano (2003). Solvability is achieved by employment of the skilled inter-regionally mobile work-force in the fixed costs and the unskilled immobile work-force in the variable costs of the manufacturing firms. This enables us to obtain real wages as explicit functions of the spatial distributions of skilled workers in the three regions. The main aim of this work is to study long-run equilibria of the model in terms of skilled workers’ migration, which is based on indirect utility differentials as given by differences in inter-regional real wage differences. For this purpose, we focus on the analysis of stability of three types of equilibria: concentration, total and partial dispersion. The first corresponds to full agglomeration of industry in one region, the second refers to an equalized spatial distribution of skilled workers across the three regions and the third pertains to a situation whereby skilled workers are equally dispersed in two of the three regions. We show analytical and numerical evidence in that the latter configuration is always unstable. We also compare our results concerning concentration and total dispersion with those of the 2-region model. Finally, we discuss the existence and robustness of bifurcations in our 3-region model.