“Production and Exchange over Space” by Chung-Yi TSE
The University of Hong Kong
If land is an essential input in good production and if the matching of trading partners is less costly when households and firms are in close physical promixity, there exists a basic tension between the dispersion and concentration of economic activities over space. The emergence of specialist middlemen would migitate such tensions, at the expense of the partial withdrawal of labor input in production. Equilibrium intermediation tends to be excessive if production is very land intensive but suboptimal if search costs are very sensitive to distances among individuals. The optimality of the intermediation allocation is robust in a multiple—region equilibrium, in which the efficiency of search can also be improved by relocating households to new regions.