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Can Information Asymmetry Cause Agglomeration?

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Executive Summary

The modern literature on city formation and development, for example the New Economic Geography literature, has studied the agglomeration of agents in size or mass. The authors investigate agglomeration in sorting or by type of worker, that implies agglomeration in size when worker populations differ by type. This kind of agglomeration can be driven by asymmetric information in the labor market, specifically when firms do not know if a particular worker is of high or low skill. In a model with two types and two regions, workers of different skill levels are offered separating contracts in equilibrium.

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