The "Information Highway" and the Location of Economic Activity

Abstract

This paper studies possible consequences from building an "information highway" for the location of firms and households in the context of a two-region, three-good model of economic geography. The advancements in information and communication technology are identified with a decrease in transportation costs for intermediate services on the one hand and with a decrease in the costs of teleworking for households on the other hand. The stability of three situations is investigated: all production in the city; manufacturing in the city and services in the rural region; manufacturing in the rural region and services in the city (service city). While the first situation can constitute a stable equilibrium, the second cannot and the third is only feasible if additional locational externalities exist for services in the city. Even then the service city can become a "virtual city" if costs of teleworking decrease enough to encourage households to move to the rural region and telework.cities, location of firms, telecommunications, information highway