This paper considers a dynamic model of industry location in which there is a tension between two forces. First, there is the agglomerating force of preference of intermediate input variety that tends to keep an industry at its original location. Second, other factors tend to pull the industry in the direction of a new location. In the equilibrium of the model, migration always takes place in the direction of lower costs. The socially efficient migration path can be decentralized as an equilibrium. If the rate of cost reduction is small, the converse that an equilibrium is efficient is also true.
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I am grateful for helpful comments from the referees and the editor. The views expressed herein are those of the author and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System. Holmes acknowledges support from the National Science Foundation under grant SES-0136842.
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- Intermediate input variety