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CEP discussion paper
Factor Price Equalization in the UK?
Andrew B. Bernard, Stephen J. Redding, Peter K. Schott and Helen Simpson
September 2002
Paper No' CEPDP0547:
Full Paper (pdf)

JEL Classification: F14;C14

Tags: elative factor prices; diversification cones; technology; economic geography

This paper develops a general test of factor price equalization that is robust to unobserved regional productivity differences, unobserved region- industry factor quality differences and variation in production technology across industries. We test relative factor price equalization across regions of the UK. Although the UK is small and densely-populated, we find evidence of statistically significant and economically important departures from relative factor price equalization. Our estimates suggest three distinct relative factor price areas with a clear spatial structure. We explore explanations for these findings, including multiple cones of diversification, region-industry technology differences, agglomeration and increasing returns to scale.