The Day After Covid-19: Implications for Growth, Specialization, and Inequality

Abstract

In the post-pandemic world, digital communication will be integral part of daily working to a higher extent than before, with a disproportionally strong impact on knowledge-based activities, like innovation and research. We present a multi-area endogenous growth model where abstract knowledge flows at no cost across space but tacit knowledge arises from the interaction between researchers and hence is hampered by distance. Digital communication reduces this "cost of distance" for flows of tacit knowledge and reinforces productive specialization. This increases the system-wide growth rate, but at the cost of an increase in inequality within and across areas.