On the persistence of regional income inequality in Thailand: Human capital and agglomeration effects

Based on the recently flourishing developments in the theories of increasing returns to scale, monopolistic competition and human capital, I propose a theoretical model to explain the phenomenon of persistent regional income inequality, such as is the case in Thailand. My theoretical findings show that the share of the modern sector, the fixed costs incurred in setting up the modern sector, the local average level of human capital stock, and the distribution of individual endowments are among the major factors that play determinant roles in the evolution of divergence in personal and household income between regions. Econometric cross-section and various-year comparisons are conducted on the income and expenditure household survey data sets, with detailed information on more than 10,000 households across Thailand, collected by the Thailand Statistical Office in 1975, 1981 and 1989. Two measures are constructed to represent the spillover effect of the local average level of human capital stock and the regional agglomeration effect of the modern sector. The empirical evidence found strongly supports the theoretical hypothesis that interaction and mutual reinforcement of these two effects are the underlying economic forces driving regional income inequality. Along this line, overall income inequality in Thailand is explained by the uneven distribution of income among regions, which in turn is explained by the uneven spatial distribution of economic activity and of human capital.