Agglomeration Economies and Optimal Efficiency Wage

Agglomeration Economies and Optimal Efficiency Wage

In this paper we consider a model of optimal efficiency and agglomeration economies .Given the presence of urban and social externalities and in the absence of corrective policy, the efficiency wage chosen in decentralized market economy is too high. Indeed, in her optimal choice of wage and employment, the representative firm does not take into account of these agglomeration positive externalities which leads to a sub optimal city size. We have shown that an optimal wage employment allocation exists and can be implemented through a subvention taxation policy if it is available.