UiS Business School Seminar: How Uncertainty Shapes the Spatial Economy

Abstract

We develop a dynamic general equilibrium trade model in which the economy is a collection of spatially separated competitive markets and agents (workers/consumers) choose optimally where to locate and seeking for a job. Agents are heterogeneous based on (i) their pre-determined choice of a region, sector and occupation and, also, on (ii) a non-insurable risk of aging, that implies a lower option value when changing region and job characteristics. By solving for the resulting dynamic spatial quantitative model with labor mobility under uncertainty we show that rational households behave differently compared to a setting with perfect foresight (e.g. Caliendo et al., 2019). In particular, adjustment to shocks slows down, with more people being stuck in poorer regions and higher inequality across regions and sectors in the long run. Furthermore, greater volatility in the productivity of a job (holding constant the mean) results in a strong decline in the attractiveness of those jobs. Using detailed administrative French data, we quantify the productivity-loss-equivalent of a rise in uncertainty and we document that the impact on the individual lifetime welfare of an increase in uncertainty is comparable to the one of a medium-large negative productivity shock.