Social Welfare and Income Inequality in a System of Cities

This paper develops a general-equilibrium model of a system of core-periphery cities to examine the main determinants of intra- and inter-regional income disparities. The economy is populated by a continuum of (homogeneous) unskilled and (heterogeneous) skilled workers. Unskilled workers, whose wages are determined competitively, specialize in food production in local cities; skilled workers, whose wages are determined according to a Nash bargain, manufacture a high-tech commodity in the metropolis. We establish conditions under which this core-periphery equilibrium spatial configuration emerges. We show that both intra- and inter-regional income disparities are present; the determinants of each type of disparity and the social-welfare implications are fully investigated. Our results suggest that public policy programs that improve income equality may not be necessarily welfare enhancing.