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38. A Appendix: Theoretical Model We use multi-region versions of a model that combines features of Krugman (1991), Helpman (1998), Tabuchi and Thisse (2002) and Murata (2003).32 A.1 Demand The world economy consists of regions and is populated by a given mass of individuals, L, indexed by k. We divide the set of all regions into two subsets, which we call âcountriesâ, A(ustria) and R(est of the world). For notational convenience, we assume that regions 1 to belong to country A, while the remaining regions belong to country R. Labor is mobile within countries but immobile between countries. Each individual is endowed with one unit of labor, which is the only factor of production. Individuals derive utility from the consumption of goods as well as, potentially, from an exogenous and idiosyncratic preference parameter associated with individual regions.
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39. The component of utility that is associated with consumption is modelled as a CobbDouglas combination of a CES (Dixit-Stiglitz) aggregate of varieties of a tradeable good, M, and consumption of a non-tradeable resource, H: U = CM CH 1 ; 0 < < 1: Since H is a non-tradeable and exogenously given local resource, we refer to it as âhousingâ, following Helpman (1998).
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